Financial Markets Evolution: From the Classical Model to the Ecosystem. Challengers, Risks and New Features (Palgrave Macmillan Studies in Banking and Financial Institutions) 3030713369, 9783030713362

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PALGRAVE MACMILLAN STUDIES IN BANKING AND FINANCIAL INSTITUTIONS SERIES EDITOR: PHILIP MOLYNEUX

Financial Markets Evolution From the Classical Model to the Ecosystem. Challengers, Risks and New Features

Edited by Galina Panova

Palgrave Macmillan Studies in Banking and Financial Institutions

Series Editor Philip Molyneux, University of Sharjah, Sharjah, United Arab Emirates

The Palgrave Macmillan Studies in Banking and Financial Institutions series is international in orientation and includes studies of banking systems in particular countries or regions as well as contemporary themes such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk Management, and IT in Banking. The books focus on research and practice and include up to date and innovative studies that cover issues which impact banking systems globally.

More information about this series at http://www.palgrave.com/gp/series/14678

Galina Panova Editor

Financial Markets Evolution From the Classical Model to the Ecosystem. Challengers, Risks and New Features

Editor Galina Panova Banks, Monetary Circulation and Credit Department Moscow State Institute of International Relations (MGIMO-University) Moscow, Russia

ISSN 2523-336X ISSN 2523-3378 (electronic) Palgrave Macmillan Studies in Banking and Financial Institutions ISBN 978-3-030-71336-2 ISBN 978-3-030-71337-9 (eBook) https://doi.org/10.1007/978-3-030-71337-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: © QQ7/iStock/Getty Images Plus This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

This book examines the most urgent problems associated with assessing the prospects for transforming the business models of financial intermediaries and the efficiency of financial markets. It covers a complex of fundamental (international and domestic) factors in the development of financial markets in the context of the economy digitalization. Separate chapters provide the analysis of modern approaches to ensuring banks’ sustainable progressive development, taking into account the peculiarities of banking risk management and anticrisis regulation of their activities at the macro- and microeconomic level. The constantly changing market environment, the volatility of the market conditions, the place and role of financial markets and their participants, as well as insufficient knowledge of the issues of financial stability of the latter in the global economy, indicate the relevance of the issues raised in the monograph. Scientists from Russia, Kazakhstan, Azerbaijan, Mongolia, Ireland and Italy took part in the work on the monograph, who presented their approaches, expert opinions on the most pressing issues of modern science and the practice of financial intermediaries in the conditions of

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economic transformation under the influence of the 4th Industrial Revolution and the COVID-19 pandemic. The authors invite the reader to explore current trends in the development and improvement of banks (central and commercial), insurance companies, pension funds in the digital economy. The book presents controversial theoretical approaches and practical application of bank business models; shows how the face of traditional financial markets is changing when introducing innovative bank business models; determines the role of banks implementing projects to create ecosystems during the financial markets’ technological transformation. The monograph is aimed at bridging the knowledge gap between technology developers, bank employees and other financial market participants, as well as to develop the best policy options for banks, whose needs in digitalization dictate life itself. Financial intermediaries make their choice depending on the availability of competitive advantages, specialization or prospects of their business model. The book is designed for a wide range of readers interested in the transformation of financial markets and the development of their participants. Moscow, Russia

Galina Panova

Acknowledgements Moscow State Institute of International Relations (MGIMO University), Moscow, Russia.

Contents

Introduction Galina Panova Financial Markets: Current Trends and Factors that Determine the Functioning of Financial and Credit Institutions Irina Yarygina and Tural Mamedov

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Paradoxes of Financial Market Institutions: Traditions and Ecosystems Galina Panova

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The Role of Financial Intermediaries in Digital Economy Development (Chapter23) Alla Dvoretskaya, Aibota Rakhmetova, and Gaukhar Kalkabayeva

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Internationalization of Financial Markets: World Financial Centres Vitalii Klevtcov and Artem Zamlelyy

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Contents

New Challenges for Financial Market Infrastructure Risk Management Systems Dmitry Panov Payment Systems in Digital Economy Aleksei Bolonin and Vladimir Balykin

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Role of National Currencies in Transforming International Monetary System Vladimir Shapovalov

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Monetary Policy: Global Trends and the Development of Bank of Russia’s Approaches Veronika Zagoyti

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Financial Innovations, Financial Engineering and Financial Technologies: Risks or New Opportunities? Innovations and New Financial Technologies in the Practice of Banking Aleksei Bolonin, Igor Turuev, and Vladimir Balykin

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Banks and Banking: New Trends and Challenges Marco Ricceri, Valentina Tarkovska, and Irina Yarygina

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Transnational and Regional Banks Elena K. Volkova

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Analysis of Banks with State Participation Functioning the Role of Development Banks in the Global and National Dimensions Vitalii Klevtcov and Artem Zamlelyy

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Insurance Companies: Prospective Business Models Natalia Adamchuk, Vladimir Osipov, and Lyudmila Tsvetkova

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Insurance of Financial and Credit Institutions Natalia Adamchuk, Vladimir Osipov, and Lyudmila Tsvetkova

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Contents

Pension Funds and Prospects for Reforming the Russian Pension System as a Condition for the Qualitative Implementation of the State’s Social Policy Aleksei Bolonin

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Microfinance Organizations in Russia and Abroad Ksenia Trushina and Olesya Gracheva

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Sustainability Trend in Russian Banking Sector Amin Babazade

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Responsible Principles in Banks: Short-Term Trend or Inevitability? Inal Kishmariya

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Managing the Risks of Financial Intermediaries: Transforming Approaches and Reality Dmitry Panov and Irina Larionova

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Problems of Ensuring the Financial Stability of Financial and Credit Institutions in the Digital Economy Irina Larionova and Dmitry Panov

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Crisis Regulation by Financial Intermediaries Irina Larionova and Kirill Gorelikov

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Banking Stress Testing Elena Meshkova

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Mega-Regulation of Financial Markets Vitalii Klevtcov and Artem Zamlelyy

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Conclusion Galina Panova

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Index

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Notes on Contributors

Natalia Adamchuk is Honorary Worker of Higher Professional Education, Professor, Doctor of Economics, Professor of Insurance and Risk Management Department of Moscow State Institute of International Relations (MGIMO University). It published more than 100 articles in professional magazines and 4 monographs. The sphere of scientific interests and research includes the convergence of the financial market, the global insurance industry, international practice of foreign investment protection, insurance of digital economy risks, insurance in the risk management system of commercial enterprises, insurance marketing. Amin Babazade is a Researcher, an Economist, a Scholar and a Ph.D. candidate at the Department of International Finance at Moscow State Institute of International Relations (MGIMO University). He holds two advanced postgraduate degrees, one in Business and Economics from Linnaeus University and a second in International Accounting from Moscow State Institute of International Relations (MGIMO University). Research interests include international finance and economics, development of theoretical frameworks and practical recommendations

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for sustainable finance implementation in emerging markets, as well as application of econometrics in scientific research. Vladimir Balykin is Ph.D. student at MGIMO University. He also worked at KPMG (Audit, Financial Services). His main research interests are money theory, banking supervision and economic history. Aleksei Bolonin is Professor of Economics at the Moscow State Institute of International Relations (MGIMO), Moscow, Russia. After working in the Department of Economic Analysis of an Investment Bank and the Research Institute of the Accounts Chamber of the Russian Federation, he switched to teaching and has been engaged in academic activities for over 20 years, lecturing as a visiting professor at the Financial University and RUDN University in Moscow. Research interests: banking, financial analysis, payment and settlement systems, innovation and investment. He has a doctorate in economics. Alla Dvoretskaya is Doctor of Economic Sciences, Full Professor. She is also Head of Economics and Finance department at the Russian Presidential Academy of National Economy and Public Administration (Faculty of economic and social sciences), where she teaches courses on Finance, Money, Credit and Banking. She has more than 30 years of experience in research monetary sphere. Research interests include the development and systemic transformation of the capital market, monetary regulation, the development of financial institutional sector, functional banking modernization. Today her research interests focus on actual problems in interaction of the innovation sector and financial institutions in the digitalization age. Kirill Gorelikov is Associate Professor at MGIMO-University. He is the author and editor of numerous publications on the monetary economy and financial crisis, including the small open economy and exchange rates and monetary policy models. His main research interests include monetary and economic issues in global economy, monetary policy, exchange rates crises and bank runs. Olesya Gracheva graduated from the Moscow State Technical University. Bauman is now a postgraduate student of the Department of

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International Relations and an economist at MGIMO University. Her research interests are focused on the development of a system of financial support for small- and medium-sized businesses, in particular lending to small- and medium-sized businesses, etc. Interested in microfinance organizations in Russia and Abroad. Gaukhar Kalkabayeva is Candidate of Economic Sciences, Associate Professor, Professor at the Department of Bank Management and Financial Markets of Karaganda Economic University of Kazpotrebsoyuz. Her research interests include the development of bank lending and credit support for small- and medium-sized entrepreneurs, financing the activities of subjects of the innovation sector of the economy. Inal Kishmariya is a Ph.D. student of the Department of International Finance in the Moscow State Institute of International Relations (MGIMO University). His research interests include the sustainable economic development, ESG risks, responsible investment and responsible banking. Inal has worked for Gazprombank, providing rating and sustainability advisory services to the financial institutions in Europe and CIS. Inal has an experience in the development and validation of credit rating models and the assessment of ESG risks as well as the elaboration of the green bonds’ frameworks. Vitalii Klevtcov is a Professor at MGIMO, head of the department of Financial and Investment management at the Financial University under the Government of the Russian Federation. Research interests include the development of the housing finance mechanism, mega-regulation of financial markets, research on the development of financial markets, global financial centres, business models of financial and credit organizations, technological innovations, and financial and non-financial factors business valuation. He defended his doctoral dissertation in Finance, Money Circulation and Credit. Irina Larionova is Doctor of Economics, Professor (Economics, Banking & Finance) Moscow State Institute of International Relations (MGIMO University), Financial University under the Government of the Russian Federation. The author’s research activities are focused on identifying fundamental and applied problems and finding solutions to

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overcome them in the field of ensuring financial stability in the financial markets and the banking sector, risk-based regulation and management at the macro- and micro-levels, assessing the effectiveness of anticrisis mechanisms, risk management in credit institutions and others. Experience in research activities is more than 15 years. More than 200 publications in economics and banking, 19 monographs. Tural Mamedov is an expert in economics and finance. Research interests include the development of investment cooperation between the CIS member countries, the study of role of foreign direct investments (FDI) and banks in the development of the integration process of the CIS countries, the analysis of the public-private partnership (PPP) in the global economy. Publications are on the international economics and finance. Elena Meshkova is Associate Professor at Financial University under the Government of the Russian Federation. She has more than 15 years of experience in research and lecturing on banking and risk management in banks. She has worked as a head of risk management department for Russian Agricultural Bank. Her scientific interests include banking risk management and banking regulation. Vladimir Osipov is Doctor in Economics, Professor of Asset Management Department at MGIMO—university (Russia) and also Guest Professor of School of Economics and Management at Beijing Jiaotong University (China). He is the Member of American Law and Economics Association, Editorial Boards Member of several scientific Journals. He has published over 160 articles in professional journals and sixteen books as author, co-author, editor and co-editor. His primary research expertise embraces institutional policy and public administration. He is ViceHead of Dissertation Council of Lomonosov Moscow State University. The area of his scientific and research interests consist of institutional policy, market architecture and digital economy. Dmitry Panov has a Ph.D. in Economics. He is a Lecturer at MGIMO University specializing in topics relating to the Banking and Financial Industries. Beside the University he has been working for the Central Bank of Russia, large commercial banks and held different positions in

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risk management. He currently continues to work as a deputy CRO for the National Clearing Center and the Moscow Exchange Group. Galina Panova is Doctor of Economics, Professor (Economics, Banking & Finance) of the International Finance Department at MGIMOUniversity, former Vise-Rector of the Financial Academy under the Government of the Russian Federation and former head of the “Financial markets” Department of the Analytical Centre of the Government of the Russian Federation. She is consultant, author and editor of numerous publications on monetary policy and banking in Russia and abroad. Her current primary research expertise embraces modern finance; global and national finance markets and financial intermediaries in the face of digital transformation, banks and banks’ management. She has been the leader and responsible executor of more than 20 international research and development projects on those issues. She is member of the Committees of the Association of Russian Banks, working groups of the State Duma of the Federal Assembly of the Russian Federation, member of Dissertation Council. She has more than 30 years of consultancy experience for top management bankers of the Central Bank of Russia and commercial banks. Aibota Rakhmetova is Doctor of Economic Sciences, Associate Professor, Professor at the Department of Economic Theory and State and Local Government of Karaganda Economic University of Kazpotrebsoyuz. Her research interests include problems of macroeconomic regulation; the interaction of the banking and real sectors of the economy; financial support for the development of real innovations; development of the banking system; role of financial and credit organizations in ensuring economic growth. Marco Ricceri Expert, European social and labour policies, is acting as general secretary of the EURISPES, a primary Italian research institute in the economic, social, territorial development. Ricceri is also a coordinator of the Ethic Committee of the A.E.I.—European Agency of Investments, Geie, Bruxelles; enrolled in the list of “Pool of Reviewers” of the ESF-European Science Foundation, Strasbourg, for: “European Social Policy”, “Industrial Relations”. Co-founder and coordinator of the

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European Research Group “European Social Model” (London-BremenRome). Founding member of EAVI-European Association for Viewers Interests (Brussels), dealing with the dissemination of Media Literacy and Media Education. Ricceri was awarded the Degree Honoris Causa in European Policies by the Institute of Europe of the Russian Academy of Sciences. IE-RAS. Vladimir Shapovalov has a Ph.D. in Economics. He is an Associate Professor at MGIMO University in Moscow specializing in topics relating to International Relations, Country Risks for Translational Business and Financial Regulation of Global Politics. He has been lecturing in respective specialization courses in the frame of MGIMO International Relations Master’s programme since 2005. Mr. Shapovalov also holds position as Head of Bilateral International Relations Division with the Central Bank of Russia. Prior to the Central Bank, he was executive board member of Renaissance Capital Investment Group, vice-president of Uralsib Bank and Head of Risk Management Department in Deutsche bank Moscow. Dr. Prof. Valentina Tarkovska (Banking & Finance), Specialist (Engineering), Honorary Fellow, Management School, University of Liverpool, UK. Lecturer in Corporate Finance (Universität Witten/Herdecke, Germany) Auf der Heide 100, 58313 Herdecke, Germany & Dublin Technological University. Main interests: business, finance, financial markets and analysis. Publications in the named spheres. Valentina is a member of Academic course committees Postgraduate Diploma in Finance, M.Sc. Finance M.Sc. International Business, a member of Assoc. of North America Higher Education International (ANAHEI)’s Council. Discussant and session chair: Academy of Management Annual Meeting, Reviewer: EURAM conference, European Management Review. Ksenia Trushina has a Ph.D. in Finance and Credit. She is an Associate Professor at Moscow State Institute of International Relations (MGIMO University) at the Department of International Finance. Research interests include regulation of the banking and financial systems, specifically anticrisis regulation, the development of methodology and

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implementation of International Financial Reporting Standards in financial system of Russian Federation. She is also interested in the development of the banking sector and the financial system of Russia, including strategies of Russian banks in the field of development, marketing and use of FINTECH. She is working for Bank of Russia’s Department of regulation of accounting. Lyudmila Tsvetkova has a Ph.D. in Economics. She is an Associate Professor of the Moscow State Institute of International Relations (MGIMO-University, Department of Insurance and Risk-management) and Associate Professor of the Higher School of Economics (Department of World Economy). She published more than 100 articles in professional magazines and 5 monographs. The main sphere of scientific interests—strategic risk management, management of insurance company. Igor Turuev has a degree of Doctor of economic Sciences. Professor of the Department international relegations of Moscow State Institute of International Relations (MGIMO University) specializes in the issues of Economics, phenomena and processes of the economic life of society, on the methods in the tools of research of these phenomena, on the ways and means of solving economic problems. For 26 years he gave a full course of lectures and conducted seminars on the subject “International monetary relations”. Together with the staff of the Department, he developed and introduced into the educational process a number of specialized courses. He actively works in the expert Advisory Council of the Central Bank of the Russian Federation, takes part in the organization and holding of conferences of MGIMO, Russian Academy of Sciences, Financial University under the Government of the Russian Federation. Experience in practical management of various areas of banking. Elena K. Volkova is an Associate Professor at the Belarusian State University who teaches at the Departments of Corporate Finance and Analytical Economics and Econometrics. At MGIMO-University she taught courses “Deposit and credit policy of banks”, “Anti-crisis regulation of the activities of financial and credit institutions”, “International

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experience of corporate finance and lending”, “Investing banking business”, “Digital financial instruments”. She holds Ph.D. in Economics from the Financial University under the Government of Russian Federation. Has a long practical experience in large credit institutions and in the Federal Treasury of Russia. Carried out activities in systemically important banks in Russia in the areas of lending to legal entities and individuals, project financing, credit risk management, methodology, monitoring and administration of credit operations, interaction with government agencies. Her research interests include issues of risk management and modern development of credit organizations. Dr. Prof. Irina Yarygina (Economics, Banking & Finance), head of the Chair “Economics and banking” of the International Institute of energy policy and diplomacy of MGIMO under the Ministry for Foreign Affairs of the Russian Federation, Head of Programmes of the Financial University under the Government of the Russian Federation, member of the International Committee of the Association of Russian Banks, member of the working group of the State Duma of the Federal Assembly of the Russian Federation, member of Dissertation Councils, member of the Association “Analytics”, Head of the Analytical department of the Eurasian consortium (EIAC), Member of the Scientific Council of the National Committee on BRICS research. 165 publications in economics and banking, 19 monographs. Veronika Zagoyti is a Ph.D. student at the Moscow State Institute of International Relations (MGIMO-University). She also works as a Lead Economist at the Bank of Russia’s International Cooperation Department and analyses recent economic developments of foreign countries paying much attention to the monetary policy. Her research interests include the implementation and development of the inflation targeting regime in the member states of the Eurasian Economic Union as well as the elaboration of a single monetary policy within the Union. Artem Zamlelyy has a Ph.D. in Finance, Money Circulation and Credit, the first protector of the BRICS University. Research interests are formed by studying investment financing instruments considering

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non-financial factors, digitalization of financial markets, cost factors of financial products and financial services, and alternative finance.

List of Figures

The Role of Financial Intermediaries in Digital Economy Development (Chapter23) Fig. 1

Fig. 2

Diagram of the dependence of the results of innovative activity on the indicators of bank lending (for legal entities), including in the context of lending terms in the Republic of Kazakhstan. Note Compiled by the authors based on simulation results Diagram of the dependence of the results of innovation activity on various types of financial assets in the Republic of Kazakhstan. Note Compiled by the author based on the results of modelling

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Role of National Currencies in Transforming International Monetary System Fig. 1

Share of currencies in international payments (excluding payments within the EU). Source SWIFT RMB Tracker https://www.swift.com/swift-resource/250136/download

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List of Figures

Monetary Policy: Global Trends and the Development of Bank of Russia’s Approaches Fig. 1 Fig. 2

Policy rates in the EAEU countries (Source Refinitiv) CPI, % year on year, standardized, not SA (Source Refinitiv)

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Insurance of Financial and Credit Institutions Fig. 1

Fig. 2

Correlation of per capita income and share of the income saved (Source calculated by the author using the website of the Federal State Statistics Service where the average per capita income by years was given [electronic resource]) Correlation of the average insurance premium and the share of the income saved (Source calculated by the author using the website of the Federal State Statistics Service where the collected insurance premiums by years were given [electronic resource])

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Sustainability Trend in Russian Banking Sector Fig. 1

Degree of sustainable banking practice by Russian banks by 5 categories of indicators (Source Compiled by the author)

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Responsible Principles in Banks: Short-Term Trend or Inevitability? Fig. 1 Fig. 2

Analysis of bond issue yield functions (Source Compiled by the author, based on Bloomberg) Generation change model (Source Compiled by the author, based on UN World Population Prospects 2019)

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Managing the Risks of Financial Intermediaries: Transforming Approaches and Reality Fig. 1

Structure of the Russian financial sector, % (Source Central Bank of the Russian Federation, Annual report, 2019. http://www.cbr.ru/Collection/Collection/File/19699/ar_ 2019.pdf)

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Fig. 3

List of Figures

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Dynamics of return on equity metric for US Banks (Source Federal Reserve Economic Data [Electronic resource] https://fred.stlouisfed.org/series/USROE) Relationship between risk assessment and the formation of economic capital scheme

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Banking Stress Testing Fig. 1

Liquidity risk stress test diagram

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List of Tables

Financial Markets: Current Trends and Factors that Determine the Functioning of Financial and Credit Institutions Table 1

The main indicators of the Russian financial market in global finance

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New Challenges for Financial Market Infrastructure Risk Management Systems Table 1

Major Russian financial market players in 2014–2020 (by the start of the year)

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Role of National Currencies in Transforming International Monetary System Table 1

Trading volume on the foreign exchange market of the Moscow Exchange, RUB billion

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List of Tables

Transnational and Regional Banks Table 1

Top 10 World Banks 2019

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Microfinance Organizations in Russia and Abroad Table 1 Table 2

Microloan agreements concluded in 2017–2019 Categories of small- and medium-sized businesses in Russia and the USA

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Sustainability Trend in Russian Banking Sector Table 1 Table 2

Sustainable banking practice implementation Bank sustainability indicators (in points)

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Problems of Ensuring the Financial Stability of Financial and Credit Institutions in the Digital Economy Table 1

Assessing the impact of increasing the capital adequacy ratio by 1 percentage point on the credit volume and growth

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Crisis Regulation by Financial Intermediaries Table 1

Measures to support the banking sector in different countries during the global financial and economic crisis of 2007–2009

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Banking Stress Testing Table 1

Cross-correlation between the most evident factors defining the target variable

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Mega-Regulation of Financial Markets Table 1 Table 2

Digital financial intermediation products Financial intermediation models in foreign countries

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Introduction Galina Panova

Introduction While this monograph was being prepared for publication, major changes were taking place in the world in all areas. Among them were pandemic, the oil crisis, a sharply increasing volatility of developing countries’ national currencies, the economic crisis, etc. The development of financial markets has a direct impact on the state of the world economy and the national economies of individual countries. Banks are interested in developing and strengthening partnerships, relationships with their customers, and they revitalize the latter’s activities. The changes taking place in the world financial markets in recent years—increased competition, globalization, new information technologies, new high-tech, structured banking products—lead to increased G. Panova (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_1

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risks, and as a result, there is a need for standardizing and tightening the requirements for the stability of financial and credit institutions. During the transition of the domestic banking system to international accounting and reporting standards, implementing the recommendations of the Basel Committee on Banking Regulation and Supervision, Russia’s participation in the WTO, development of cooperation with China and other countries of the East, ensuring the stability of financial markets and the role of Russian commercial and investment banks in the world arena became urgent tasks (Beyond: Initial Considerations, 2016; Handbook of Block Chain, Digital Finance, and Inclusion 2017; Merton, 1995; Torkunov et al., 2020). A significant place in the infrastructure of the modern market economy is occupied by commercial banks, whose international currency and credit operations are one of the main channels of communication between national markets and world markets. International currency and credit transactions of commercial banks are among the most important areas of banking, both within the global monetary and financial system, and within national monetary and financial systems, and are in a complex interdependent relationship with the cross-border movement of goods, capital and services. For Russian commercial banks, most of which are still inferior to leading foreign financial and credit institutions in terms of the size of their banking business, including the equity capital, the client base, the deposit and loan portfolios, etc., it is especially important to solve the problems that ensure their financial stability, thus promoting growth and development. Customer banking is one of the most promising areas of the banking business. From the bank’s point of view, a wide range of operations and services is a source of interest and commission income, a way to expand its client base, attract new customers and develop cooperation with foreign banks and international financial and credit institutions. Thanks to their activities, global national and international projects are being implemented. If we take the modern economy, financial and credit institutions are faced with the issue of minimizing the risks associated, inter alia, with the

Introduction

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foreign economic activity of their clients (currency, interest, credit, operational, etc.). Analysis of opportunities to reduce risks when conducting transactions by financial intermediaries, as well as ensuring stable profitability even when increasing the influence of unfavourable trends in the economy, determines the relevance of the issues raised by the authors. The new realities combined with the geopolitical risks faced by all countries require to search for non-standard approaches for solving domestic economic problems. They can be solved by identifying internal reserves and determining the points of stimulating economic growth. One of the sources of economic growth, as you know, includes a positive trend in the industrial production volume, which is ensured by increasing the potential and expanding the business activity of economic entities, which are supported by the investments’ inflow and the financial intermediaries supporting companies by providing the required amounts of credit resources. One of the sources of economic growth is the banks’ financial resources, whose share in the financial system, according to the IMF estimates, is more than 80%, and their potential is incomparable to other financial intermediaries in Russia. At the same time, the Russian banking system has a low potential in comparison with its Western competitors. In these conditions, it is necessary to increase the role of banks in lending to the economy and ensuring its growth and development. In modern conditions, the credit potential of many Russian financial and credit institutions is limited due to the influence of several factors, including the external ones. At the same time, banks make a significant contribution to solving these problems due to their higher capitalization, a high level of creditors’ trust, access to sources of refinancing and state support. From the theoretical point of view, there is no consensus in the scientific works on a number of issues that require reflection and practical solutions: – modern problems of financial markets and the financial and banking sector’s growth and development, changes in the industry associated with the digitalization of the economy and other spheres of people’s lives;

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– fintech as an attempt to solve the problems arising in the context of the fourth industrial revolution; – financial innovation, risks and institutional stability of financial markets. The study determined the position of the authors regarding the role and importance of financial markets and financial and credit institutions in the context of the digital economy, theoretically substantiated and determined the criteria for the effectiveness of banks and other financial intermediaries in the context of the digital transformation. The work identifies reserves for increasing the stability of financial and credit institutions and dwells upon increasing their efficiency, which can be taken into account in the work of state authorities, regulators, commercial banks and the legislative body.

Methodology The methodological basis of the study was made up of the works of both Russian and foreign scientists, experts (Ashmarina & Mantulenko, 2021; Ashmarina et al., 2020; DaSilva et al., 2013; Handbook of Block Chain, Digital Finance, and Inclusion, 2017; King, 2020; Merton, 1995; Torkunov et al., 2020), international organizations (A Glossary of Terms Used in Payments and Settlements Systems, 2001; Beyond: Initial Considerations, 2016; Schwab & Malleret, 2020), central banks and individual credit organizations, which to some extent addressed the financial stability of the banking sector, its individual institutions, as well as the impact of regulation on economic development. The study used general scientific methods: abstraction, an ascent from the abstract to the concrete, typology, induction, deduction, analysis, synthesis, the unity of the historical and the logical, as well as comparative methods, benchmarking and recommendations of international consultants. The analysis was based on materials from the World Bank, Bank for International Settlements, Bloomberg, Citibank, Banking Association for Central and Eastern Europe (BACEE, Hungary), the Central Bank of the

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Russian Federation, the Association of Russian Banks (ARB), Sberbank and Tinkoff Bank (Russia), etc. The main objective of the monograph is to identify modern problems of the financial markets and financial and credit institutions in the context of the economy digitalization and work out the recommendations for overcoming them.

Results Financial Markets: New Approaches to Defining the Conceptual Apparatus Before analysing the current state and prospects for the development of financial markets, it is important to define the very concept of the financial market, since experts sometimes put different meanings in this term. For example, the Financial and Credit Encyclopedic Dictionary defines the financial market as “a part of the loan capital market, where capital is redistributed between creditors and borrowers in the form of emission and sale of securities)” (Finance and Statistics, 2004, p. 866). And it is further emphasized that, from the institutional point of view, the financial market is a set of credit and financial institutions through which there is an overflow of financial flows from owners to borrowers and vice versa. Financial intermediaries include various financial institutions (commercial banks, credit unions, stock exchanges, financial companies, pension and insurance funds, investment banks, construction companies, etc.). We believe this interpretation is too narrow for the modern understanding of the essence of the financial market and its participants. And in this monograph uses a different approach, according to which financial markets include the following: the financial markets that differ in the types of financial instruments used (the market for stocks, bonds, derivative financial instruments); financial markets that differ in the types of operations performed (credit market, options market, forward market, etc.); those differentiated by the operation urgency (instant,

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spot or pronto market), the markets in which financial intermediaries perform short-term transactions (money market) and long-term transactions (capital market); stock market, securities market, etc.

Modern Trends If we speak of financial globalization, we can say that world trends in the development of financial markets and financial and credit institutions fully affect Russia. Modern realities make it possible to single out the following main factors determining the financial markets‘ development: financial globalization; increased competition; information technology development, financial innovation and financial engineering; increasing risks, crises, etc. The globalization of financial markets, including the expanding presence and the increased number of company mergers and acquisitions, has become an important stimulus for developing financial intermediation. In the context of global competition, financial and credit institutions consider the internationalization strategy as a priority and enter the international market, first strengthening their positions in the national market and then expanding their international presence. Globalization has created an integrated world banking system, which is reflected in a concentration of assets (the 20 largest banks in the world accounted for 50.5% of world GDP in 2015), and in an increased presence of foreign banks in banking systems of developing countries. The development of information and telecommunication technologies (complication, quality improvement, speed and convenience of operations carried out by financial intermediaries, as well as a sharp decrease in their cost price) has radically changed people’s daily life and the essence of the banking business. For example, the world monetary system in recent years has been “drifting” from the one that unites national monetary systems based on the turnover of national currencies into a multicurrency system based on the widespread use of advanced information technologies. Digital currencies developing on the basis of the blockchain technologies are prohibited in some countries, while in others, on the contrary, they are actively used. The Bank of Russia, as a mega-regulator

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of financial markets, is concerned about the possibility of losing control over money circulation in the country, which is fraught with serious economic and political consequences. In the future, digital currencies will find their rightful place in the global payment system, subject to the effective implementation of new digital technologies while maintaining control over financial markets at the national and international levels. Active growth and development of the securities market, including derivatives, became a crucial factor in the development of the financial and banking sectors and had a generally positive impact on the economy and banking business in Russia and all over the world, ensuring closer interaction between banks and their clients, and contributed to the interdependence of markets. At the same time, increased competition in financial markets, the development of information technology, financial innovation, financial engineering have increased risks and, as a result, provoked crises. The situation in the world markets has demonstrated that financial and banking crises have ceased to be local in nature, developing on the territory of a single country. Crises are increasingly becoming international, which means that there is a need to create a global security system based on the observance of uniform international standards for regulation and supervision of the financial and credit institutions. Global factors, including structural shifts in the global economy, the transition of the Chinese economy from growth based on export and investment to the one based on consumer demand, have increased the risks. In emerging markets, there is volatility in national currencies and national markets. The countries of the European Union are pursuing a policy of “Europe of different speeds”; in fact, a banking union has been created while ensuring financial stability. The colossal financial losses as a result of the global financial and banking crisis of 2008–2009, the economic crisis caused by the COVID19 pandemic, on the one hand, demanded anti-crisis measures to support economic entities and, on the other hand, predetermined the need to tighten the regulation of financial and credit institutions, some of which are reflected in the standards of the Basel Committee on Banking Supervision.

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The world has used various government measures to support the economy. The toolkit of central banks included various measures to overcome the crisis’ negative consequences. Among them were instruments of macro- and micro-prudential regulation to ensure the financial stability of the economy and business entities, as well as monetary regulation instruments. In November 2014, the Bank of Russia changed the monetary policy’s priorities: the inflation rate, not the ruble exchange rate, was declared as the main reference point for the monetary policy. The key rate has become the main tool for managing the amount of money in the economy. Since 2015 The Central Bank of the Russian Federation switched to a policy of a floating rouble exchange rate and an inflation targeting regime while abolishing the dual-currency corridor and refusing to conduct regular foreign exchange interventions. This decision testifies to the exhaustion of the economic growth model based on income from trade in raw materials and a gradual transition to a model of economic growth based on a new technological order. Increasingly active use of new information technologies is becoming a feature of macroeconomic regulation in modern conditions. The above trends are closely interconnected and directly correlate with macroeconomic indicators including inflation rates in the country, which have not exceeded 4% over the past several years. The policy of the Government and the Central Bank of the Russian Federation includes a wide range of anti-sanctions measures, from tough measures to introduce counter-sanctions to the creation of more comfortable conditions for doing business in Russia to its allies from the CIS member states, the EAEU, the SCO and the BRICS. During the crisis and post-crisis development, many countries of the world (including Russia) are gradually shifting the emphasis on stateregulated economy, using, among other things, instruments of macroprudential regulation aimed at curbing the credit boom, minimizing currency risk, limiting leverage, smoothing financial cycles, increasing the stability of systemically important banks, capital flow management, etc. The Bank of Russia, which acts as a mega-regulator of financial markets, on the one hand, has strengthened supervision over the activities of financial and credit institutions and on the other hand, together

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with the Russian Government, has developed a system of anti-crisis measures and a programme to support the banks suffering from international sanctions. Despite the sanctions, thanks to the consistent work of the megaregulator of financial markets, macro-financial conditions have been significantly improved—the inflation rate has slowed down to record lows; the rouble exchange rate has been relatively stabilized; the nominal key interest rate is gradually decreasing. In general, the monetary policy pursued by the Bank of Russia has created favourable conditions for economic growth. Russia’s participation in the integration processes imposes obligations to use uniform, unified and, most importantly, internationally recognized approaches, i.e. in matters of business organization of financial and credit institutions and supervisory practice. Russia’s accession to the Basel Accords helps to increase the efficiency of Russian banks, allows national credit institutions to become full-fledged participants in international banking relations, strengthens the confidence of foreign investors, which is important in the context of the globalization of the world economy and financial markets. It is important for most Russian banks in terms of the low capitalization of the national banking sector and the slowdown of the Russian economy under international sanctions, falling oil prices and the consequences of the coronavirus pandemic to apply the Basel Principles for Effective Banking Supervision, as well as introduce international banking standards in Russia. The most significant problems faced by banks were the growing bad and overdue debts and dropping liquidity. As the situation aggravated, the volatility of financial markets and, in particular, the foreign exchange market increased, which weakened the rouble, when many banks experienced the negative impact of foreign exchange and exchange rate risks. To overcome them, Russia also required additional financial resources, increasing the risks of inadequate liquidity for banks. That is why, banks had to solve the problems of spontaneous depositors’ behaviour, adapt to low credit activity of customers and an increased level of risks. The sanctions, which affected the country’s economic situation, provoked a downgrade of the sovereign credit rating by international

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rating agencies, which lowered the rating of Russian national banks. As a result, their level of trust decreased, which undoubtedly had a negative impact on the investment attractiveness of domestic credit institutions in the eyes of foreign investors and depositors. Foreign banks began to reduce the scale of their activities in Russia. The number of Russian credit institutions also continued to decline. Improving the financial stability and reliability of banks has become one of the key tasks of the Central Bank of the Russian Federation—a mega-regulator of financial markets. The current situation looks different. The negative impact of the sanctions undoubtedly affected the GDP growth rate, the stability of financial markets, the volatility of the rouble exchange rate, the financial blockade of Russian banks by the United States, EU countries and their allies. But there are also positive consequences of sanctions both at the micro-level (the level of specific economic entities, including financial intermediaries) and at the macro-level of the national economy. In this case, we are talking about identifying risks, bottlenecks in the country’s economy, the functioning of financial markets, the activities of financial and credit institutions, etc.; overcoming them and minimizing financial losses. A striking example of this practice in the context of sanctions is creating, in response to the Western threat to disconnect Russia from VISA and Mastercard systems, the national payment system, which was created in the shortest possible time and began functioning on the basis of the Central Bank of the Russian Federation. The international sanctions forced large banks to reconsider their international strategies, considering the possibility of ending their presence in European countries, while at the same time assessing positively the prospects for the development of banking business in China due to the intensifying Russian-Chinese business relations. Financial and credit institutions have almost adapted to the sanctions and at the end of 2018–2019 received profit after completing the main stage of “clearing” the sector from non-viable banks and reducing losses of rehabilitated commercial banks. In 2019–2020, the Russian economy demonstrated resilience in the face of the COVID pandemic. The country possesses modern technologies to overcome crises that have been formed in previous years.

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Therefore, the sharp drop in world oil prices, large financial costs due to the quarantine measures, of course, slowed down the economic development but did not inflict an irreparable blow on the Russian economy. The arsenal of anti-crisis measures accumulated by Russian financial and credit institutions during the period of sanctions and a series of crises in recent years suggests that the regulator has the necessary experience and tools to successfully overcome shocks in the financial market.

The Role of Banks in the Russian Financial Market The national specificity of the Russian financial markets is inherent in the prevalent banking sector, which allows experts to assert: Russian banks are so important to the national economy that the bank regulation inevitably turns into a political discussion. During this difficult historical period, Russian banks developed in difficult, contradictory macroeconomic conditions. In fact, a new macroeconomic reality has been formed in the country. Modern trends in the development of Russian financial markets include not only global trends but also national characteristics (a relatively low level of lending to businesses and the population compared to developed countries, the impact of sanctions on the Russian economy, etc.). Institutional features of the financial and banking system of Russia such as its national character, the universal nature of the special banking activities of credit institutions (the combination of credit and investment transactions is not prohibited), second-tier banks are divided into banks with a basic licence and those with a universal licence, banks have to take part in the deposit insurance system and the banking system includes the development bank—Vnesheconombank—a credit institution with a special status of a state corporation. An important direction in the development of financial markets in recent years is overcoming the growth trend of the state’s share in the assets of financial and credit institutions (which was quite justified during the crisis and reached a high level in recent years) and the incentives for fair competition among financial and credit institutions. Today, such areas of the banking business as syndicated lending, project

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financing are developing; new approaches to financing and lending for housing construction are proposed (incentives are introduced for banks participating in mortgage lending programmes and certain categories of borrowers); the insurance of individual deposits and funds in the accounts of small and medium enterprises is developing; the Banking System Consolidation Fund has been established to work with problematic bank assets. The issues of banking services to the population are of particular relevance in market conditions. There is a competitive struggle and banks resort to various forms and methods of attracting funds from the population (transactional deposits, trust services, leasing, factoring, forfeiting, brokerage, etc., banks accept deposits with compound interest, with interest accrued with respect to the inflation rate, etc.). The problem of attracting funds from the population to deposits and other forms of organized savings remains relevant, along with a decrease in the rouble’s purchasing power, lack of trust in banks, a preference to invest in foreign currency and precious metals, liquid goods, or keep funds in gold. Tightening the regulator’s requirements, as well as increasing the transparency of the banking business affect the banks‘ activities. Banks that provide clients with a variety of high-quality services usually have advantages over the ones with a limited range of services. In the market conditions, it is the banks which are constantly expanding the range of services, improving the quality of service and offering intermediary services who withstand the competition. The bank’s clients are also changing. They become more proactive. If earlier a client could apply to a bank with a request to place his funds as conservatively as possible, now he is ready for risk, which implies different business models. Digitalization, the multichannel nature of the banking business, the relationship of the bank with the client lead to the fact that personal relations with the client, personal contact are increasingly being replaced by remote interaction; mechanisms for interactive remote authentication and customer identification of a credit institution are being created, including individuals based on the use of biometric personal data.

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Tightening regulatory requirements and increasing the transparency in the banking business also affect the existing business model and the structure of the bank’s income. Economists are focused on such important issues for Russia as stimulating the growth and development of the Russian economy in the context of economic sanctions; monetary policy and its real implications for business; Russia’s participation in the international movement of capital; monetary and financial aspects of Russia’s economic strategy in the world economy; functioning and assessment of the financial market mega-regulator’s effectiveness. Economic growth restoration and the recovering economy as a whole will help overcome negative trends in the banking sector. The prospects for the Russian economy are largely determined by the investment activity and consumer demand recovery pace, based primarily on the search for additional internal sources of funding, including such alternative methods of financing as venture capital investment, P2P lending, crowdfunding and crowdinvesting. P2P lending is mutual lending to individuals, and crowdfunding and crowdinvesting are means of alternative financing, the mechanism of which involves the use of special Internet platforms, which are used to host and promote various ideas and projects. The state of the banking system is an indicator of a country’s development, its economic stability. Indeed, the banking system (as a part of the country’s economic system) develops cyclically, overcoming ups and downs, stagnation and crises. In a relatively stable macroeconomic situation, when the country is experiencing an economic recovery, growth of the gross domestic product, investments and a decrease in inflation, the banking system is developing quite successfully, which has been proved by world practice and the centuries-old history of the Russian banking system. In general, the market of banking operations and services is developing as one of the most successful segments of the economy. The current state of the Russian banking system, in comparison with the banking system s of the top economies, is characterized by the following: a high share of the public sector, low share of banks with foreign capital, a relatively small number of regional banks, weak regional system of

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commercial banks, relatively underdeveloped banking infrastructure, low banking system capitalization, when the capital and total assets of all Russian banks are comparable to the corresponding indicators of the three largest world banks. In this sense, the Russian banking system does not fully comply with the best international standards, which does not allow characterizing it as a developed one. In this regard, one of the most important areas for further research and improvement of the banking system’s functioning practice is to increase its competitive advantages by weakening negative and ensuring faster growth and the influence of positive factors in the banks‘ development.

The Role of Banks in Ensuring Economic Growth An analysis of the competitive environment cannot be carried out without taking into account the proportions of the financial (in particular, banking) and non-financial sectors of the economy, which is explained, first of all, by the relationships between banks and companies in the real sector. Today, it is the large companies that form the basis of the Russian banks‘ client base. However, the level of the banking system still does not fully meet the demand of the real sector. In these conditions, the Russian Central Bank has identified the following priorities: stimulating a more even development of the banking system between the regions of Russia, taking into account the deficit of banking services in the regions and their concentration in the central part of the country; preventing large banks from monopolizing regional markets for banking services; stimulating the concentration and centralization of banking capital, establishing cooperation between credit institutions, creating holdings, pools, syndicates with the wide involvement of medium and small banks, which is necessary to serve the real sector of the economy and ensure higher competitiveness of financial products in the banking services market; a combination of protectionist and liberal measures in relation to foreign banks, which may pose a real threat to the competitive environment in the Russian banking sector in the long term; constant monitoring the competitive environment.

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In this regard, the issues of theoretical substantiation of the banks’ role in ensuring economic growth and the practical application of measures to improve the investment climate, creating new opportunities for economic growth and increasing the financial well-being of the population are of particular relevance. For example, Russia is actively cooperating with foreign investors to stimulate investments in the Russian economy, and a tax amnesty for capital has been announced. At the same time, in the context of the infrastructural revolution, which is gaining momentum all over the world, a trend towards a digital economy especially its financial and banking sector is actively developing in Russia, having a positive impact on the transparency and openness of the business environment. Draft laws on digital assets, cryptocurrency emission and circulation are actively discussed, the conceptual apparatus for conducting operations with cryptocurrencies is determined. Projects of the interaction between the mega-regulator and financial market participants engaged in operations with digital assets are being developed. The Russian Central Bank is gradually introducing new rules for using digital platforms, including those based on distributed ledger technologies. For example, digital platforms for remote customer identification can increase the competition in the banking sector while simplifying the interface and protecting customer biometric data. At the same time, digital platforms are being created to develop fast payment systems (payments by phone number, by e-mail, etc.) along with payments by plastic cards, etc. At the same time, infrastructure platforms will not replace the existing financial and credit institutions, but become an addition to them. In Russia, the role of banks has increased significantly in recent years; the contribution of the banking system to economic growth has been especially noticeable in the field of consumer lending. Nevertheless, in general, the contribution of banks to investment is not yet large. At the same time, there is a chronic excess of savings over investments in Russia (while Russia is a large investor on the global scale, there is a lack of investment inside the country). The banking sector plays a key role in developing the economy of any state. In Russia, market relations have created certain features of both the real and financial sectors of the Russian economy. The crises

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of recent years have shown that the stable development of the Russian economy depends on the stability of the banking sector, which has been achieved, i.e. by increasing the share of state capital in the Russian banking sector. At the same time, there is a gradual concentration of banking capital against the background of a decreasing number of credit institutions. This was facilitated by fundamental (both international and national) factors, including changes in the type and structure of the Russian economy, the volatility of financial markets, as well as the regulator’s policy. In addition, it is necessary to take into account the later trends that appeared after the global crisis of 2008–2009 and during the economic downturn 2013–2015. Among them were the relative deliberalization of the economy, the emergence of elements of state capitalism, tightening the regulation of the financial sector in general and the banking sector in particular. As a result, there were processes in the banking sector that led to the strengthening of the state’s position in the banking sector. Among the factors that influenced such a change in the share of state banks over the past 10 years are the economic crisis, the government’s policy of supporting the real and financial sectors, and increasing confidence in state banks among the population. Strengthening the influence of the state in the banking sector is a trend of the post-crisis period in many countries, including the USA, Germany, France and Great Britain. This happened as there was the need to tighten regulation of banks’ activities and provide state support to the largest credit institutions during periods of instability in the financial markets. Thus, it is possible to distinguish not only structural changes in this area but also a trend towards strengthening macro-prudential control and supervision. One of these measures to minimize systemic risk was introducing the increased regulatory requirements in accordance with the Basel Recommendations for groups of systemically important banks. If we take the modern economic literature, the issue of assessing the efficiency of the state banks and banks with other forms of ownership is actively discussed. In further scientific research, it is important to find confirmation or refute the idea that the leading state-owned banks are on average as cost-effective as private Russian banks, and the main reason for the volatility of their income levels (despite support from the authorities) is increased social obligations accepted by banks with state

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participation in the capital; features of the personnel management policy; macroeconomic instability.

Banking Internationalization In recent years (before the COVID pandemic), the integration of national financial markets was actively underway. Processes such as economic globalization, the international division of labour, strengthening of international interaction have formed the basis for international economic relations, world trade, increased investment flows and, as a consequence, the development of international banking business. Banking internationalization is one of the main manifestations of the globalized economy. This is a complex and large-scale process, which previously took place in the form of an increase in the volume of exports and imports of banking services and foreign exchange transactions, and now proceeds mainly in the form of the increased importance of the banks‘ international activities. The transfer of banking activities beyond national borders occurs in its most general form under the influence of the desire to increase profits, which consists of many incentives, including financial services for the foreign activities of transnational corporations; providing banking services to domestic corporate and private clients in foreign countries and attracting local clients; cheaper attraction of funds in other countries; more profitable lending to foreign clients; participation in international banking operations—placement of syndicated loans, Eurobonds and foreign loans; international payment and settlement transactions and others. Consequences of crises, including the global financial and economic crisis of 2007–2009, the pandemic and the oil crisis of 2019–2020, necessitated greater attention to the problems of regulating and supervising the work of financial intermediaries. In this area, significant changes are observed in terms of both expanding and tightening regulatory norms that restrict the acceptance of risks by commercial banks, as well as certain organizational and content requirements for risk management. At the same time, in terms of continuing economic instability,

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especially in emerging markets, the policy of the regulator to “cleanse” the market from non-viable credit institutions, special attention has been paid to the problems of identifying credit institutions with problems at the early stages of their crises, as well as financial recovery in different forms. The regulatory practice is rapidly developing and modernizing, which prompts the need for systematizing and generalizing the ongoing changes. One of the most controversial issues in the national financial markets in terms of achieving positive macroeconomic effects is the way credit institutions can be regulated and supervised. Taking into account the observed trends in this subject area at the national and global levels, the problem of building an effective system of regulation and supervision raises many questions that require theoretical understanding. The monograph combines theoretical and applied issues and reflects current trends in the regulation of financial intermediaries at both macroand micro-levels. The advantage of the monograph is that it not only considers regulatory and supervisory practice from the organizational and substantive points of view but also analyses the current state and development of the financial and credit institutions at all stages of their life cycle. An independent section is devoted to the risk regulation at the microand macro-levels, changes in the banking regulation and supervision, as well as a number of others. The monograph is intended for students and young scientists, teachers and specialists dealing with this issue.

References A Glossary of Terms Used in Payments and Settlements Systems. (2001, January). Basel. Retrieved from http://www.bis.org. Ashmarina, S. I., & Mantulenko, V. V. (2021). Current achievements. Challenges and Digital Chances of Knowledge Based Economy. https://doi.org/10. 1007/978-3-030-47458-4.

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Ashmarina, S. I., Vochozka, M., & Mantulenko, V. V. (2020). Digital age: Chances. Challenges and Future. https://doi.org/10.1007/978-3-030-270 15-5. Citibank Report. (2016). Digital disruption: How FinTech is forcing banking to a tipping point. https://www.citivelocity.com/citigps/ReportSeries.action?rec ordId=51. DaSilva, C. M., Trkman, P., Desouza, K., & Lindic, J. (2013). Disruptive technologies: A business model perspective on cloud computing. Technology Analysis & Strategic Management, 25 (10), 1161–1173. https://doi.org/10. 1080/09537325.2013.843661. Financial-credit encyclopedic dictionary/under Ed. Griaznova A. G., Moscow, Finance and Statistics (2004). (ᶲinancovo-kpeꚀitnyЙ ЭncikloᴨeꚀiqeckiЙ clovapb. kollektiv avtopov ᴨoꚀ obw. peꚀ. GpЯznovoЙ A.G. Mockva, ᶲinancy i ctatictika, 2004). Handbook of Block chain, Digital Finance, and Inclusion. (2017). Prof. David Lee Kuo Chuen and Robert Deng (Eds.). King B. (2020). Bank 4.0, banking everywhere, never at a bank. Wiley. https:// www.ozon.ru/publisher/john-wiley-sons-limited-143665778/. Merton, R. C. (1995). Functional perspective of financial intermediation. Financial Management, 24 (2), 23–41. Schwab, K., Malleret, T. (2020). COVID-19: The great reset. World Economic Forum. ISBN 978-2-940631-11-7. Torkunov, A. V., Streltsov, D. V., Koldunova, E. V. (2020). Russia’s pivot to the East: Achievements, problems, and prospects. Polis (Russian Federation) (5), 8–21. Virtual Currencies and Beyond: Initial Considerations. (2016, January). IMF staff discussion note, pp. 11–15.

Financial Markets: Current Trends and Factors that Determine the Functioning of Financial and Credit Institutions Irina Yarygina and Tural Mamedov

Introduction While the Russian Federation aims to integrate into the world economy, the efficiency of this process depends largely on the success of banks in capital and services markets. In the context of the globalization of economic relations, the modern Russian economy needs to adopt the experience of transnational banks, interstate credit institutions, and private-public partnerships. Modern practices of international banks using innovative technologies contribute to implementing the principles of maximum efficiency and universality, which is directly connected I. Yarygina (B) Moscow State Institute of International Relations (MGIMO University), Financial University under the Government of the Russian Federation, Moscow, Russia T. Mamedov Baku, Republic of Azerbaijan © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_2

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with the harmonization of the basic principles of regulation and implementation of the partner states’ monetary policy. Adoption and use of international experience in the activities of financial and credit institutions contribute to the financial stability of business entities, also providing the high-quality organization of credit, financial, information, and other activities undertaken by those various institutions providing mediation functions. The UN session (New York, September 2015) adopted a resolution to promote the restructuring of the world social and economic sphere in line with the development of common principles of action. Active participation by the Russian Federation in implementing this strategic objective is an important aspect of national foreign policy at the present stage of development. The relevance and novelty of the problems discussed are intended to contribute to enabling the Russian Federation to successfully implement the development programmes aimed at ensuring that the measures taken are compatible with the international practice, comply with world standards, ensure the safety of banking operations, provide a high quality of banking services using modern digital platforms, and give professional knowledge. The success of Russia in world economic relations depends largely on how these problems are going to be solved.

Methodology The authors used the materials of domestic and foreign scientific schools describing the current trends in the fields of banks and banking and financial markets. The research uses methods of system analysis, such as deduction, induction, analysis, synthesis, etc.; graphic, statistical and econometric methods; methods of groupings and classifications, as well as a comparative historical method.

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Results The Russian Federation’s financial market today is a complex mechanism of capital redistribution between different spheres and subjects of the economy. Russia’s share in global GDP amounted to 1.67%, and the ratio of banks’ assets to GDP was at 85.9% in 2018. It is important to note that the Russian banking sector occupies a leading position in terms of total assets within the EAEU. Today, the stock market and the corporate bonds market are considered to be the most developed segments of the financial market. The share of market capitalization was 38.6% of GDP (only 0.7% of the world volume) with an annual growth of 11.4% in 2018. The ratio of the corporate bonds in circulation value to GDP was 11.5%, with yearly growth of 4.5%. The government bond market accounts for only 7.6% of GDP. The main indicators of the Russian financial market are presented in Table 1. The presented indicators testify to the positive dynamics of the Russian financial market. The securities market shows slight growth, but the sub-federal and the municipal bond market remains in deep stagnation (less than 1% of GDP). The analysis of the data allows us to conclude that the development potential of the Russian financial Table 1 The main indicators of the Russian financial market in global finance Indicator

Russia

GDP growth rate (per year) GDP, billion US$ Share of the country in the world GDP, % GDP per capita PPP, US$ The value of bank assets, billion US$ Assets/GDP, % Capitalization of the domestic stock market, % to GDP Share of the Russian stock market in the world, in % Value of corporate bonds in circulation, % to GDP Value of government bonds, % of GDP Value of sub-federal/municipal bonds, % to GDP

1.7 1657.6 1.67 27147.2 1424.6 85.9 38.6 0.7 11.5 7.6% 0.7

Source Compiled and calculated by the authors according to the World Bank and Bank of Russia (2019)

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market has not been exhausted. At the present stage, the Russian financial market is characterized by the dominance of indirect financing. It is worth noting that net assets are concentrated mainly in backbone banks, and there is a tendency to decrease the capitalization level of medium credit institutions. The digital economy is one of the priority directions of the Russian financial market development, as the Russian Federation is integrated into global economic relations. Digital technologies make credit and financial institutions improve their work quality. There is no uniform definition of the term “digital economy” in economic science. This term was first used in 1995 by the American scientist Nicholas Negroponte in his book “To Be Digital”, in which he singled out the use of information and communication technologies as the main advantage of the new economy. Don Tap Scott, in his turn, defines the digital economy as the process of interaction of people through network technologies, as a result of combining intelligence, knowledge and creativity, which contributes to the creation of shared capital and well-being (Pertseva, 2018). Practice has shown that the digital transformation of the financial sector is manifested in creating the financial technology industry. The financial technology services’ infiltration index 2019 (EY Report, 2019) showed that the main reasons for the rapid development of the global financial technology industry are the following: ● more favourable tariffs and prices compared to traditional methods of service provision; ● ease of creating an account; ● high quality of services; ● access to a variety of innovative services. However, digitalization also creates new financial risks and cyberthreats. This fact confirms the need to form a flexible approach to regulating and monitoring digitalization processes in the financial sector, which contributes to the streamlining of the financial market’s innovative transformations. The analysis showed that in 2018 the global volume of attracted resources in the financial technology services from private investors

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amounted to 111.8 billion US$ (Sedykh, 2019). Foreign direct investment (FDI), in the form of both mergers and acquisitions (M&As), and venture capital were the main sources of funding for start-up projects. In the digital era, financial markets are contributing to the emergence of new instruments; for example, in 2019, the Chicago Options Exchange started trading bitcoin futures. It is the practice and subsequent analysis of such technology in the practice of financial institutions that can be considered the criterion on which to judge whether such a decision was appropriate or not. Economic sanctions against Russia are limiting access to external sources of borrowing and preventing the Russian financial market from developing without introducing innovative technologies. It is important to note that in the “Main directions of development of the financial market of the Russian Federation for the period 2019-2021” (Bank of Russia, 2019), the Bank of Russia pays special attention to creating special conditions for making the financial market more digitalized. The main goal of the mega-regulator is to create a favourable environment for introducing financial technologies, which primarily involves the development of infrastructure platforms and the optimization of transnational banks’ (TNB) activities. For TNBs, the main fields of concern under modern conditions include the following: ● ● ● ● ●

ensuring the activities of business entities around the world; operating in global financial markets; capital strengthening, increasing assets and administrative resources; expanding operations with attracted resources; developing foreign structures, including industrial ones, with the participation of banks.

The largest multinational holdings—known as global backbone banks—include Bank of China, Citigroup USA, JP Morgan Chase & Co USA, HSBC Holdings UK, Calyon France, Ind. &Comm, Deutsche Bank Germany, Bank of Tokyo-Mitsubishi Japan, BNP Paribas France, HypoVereinsbank Germany, UBS Switzerland, etc.

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Major transnational institutions form the world’s financial centers through which international financial flows are most visible. To date, the borders of two major financial regions—Europe and the United States— have formed. The market share of FOREX London Stock Exchange is reportedly 47%. The London Capital Market is a major global center of financial services, with annual exports of up to US$20 billion. International financial centers are constantly changing, being influenced by competition and market conditions, as well as new technologies. The governments of those countries who are importers of world capital movement strive to provide competitive conditions for participants of financial markets, taking the measures to improve them. Transnational corporations’ capital is moving from one world financial centre to another in search of low costs, soft currency regulation, skilled professionals, and the good mediation of transnational banks. According to the Bank for International Settlements (in Basel), a change can be witnessed in the role of American trading platforms and the transfer of major financial markets to Asia. This fact is also evidenced by the expansion of export-import operations and their provision by credit and financial institutions, which are currently concentrated in Asian countries. The development of transnational corporations impacts the globalization of the economy. Actually, transnational corporations and transnational banks are the main driving force behind the internationalization of world finance, strengthening the interconnectedness and interdependence of participants in global economic relations. Practice has shown that the effects of transnational corporations and transnational banks on the world economy are the following: impacting market development and increase of its competitiveness; provision of foreign investment and migration of capital; influence on the pace of the development of economies of countries and their operations; management of economic crises of countries and their operations; and the technological development of world economic ties. Transnational banks play an important part in the advancement of information technologies, carrying out capital-intensive development of their software products; simultaneously transnational corporations, being a driving force of interconnected reproduction processes of the world economy, provide international labor migration. Transnational activities of corporations and banks ensure that

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the needs of economic entities in the global and regional economy are met and contribute to multilateral cooperation. Transnational banks are currently implementing investment policies in various regions of the world. Foreign investment is the capital that foreign investors provide to local businesses to make a profit. In turn, capital includes the following property and intellectual values: real estate, movable property and property rights, money and deposits, securities, intellectual property rights, and economic activity rights granted based on legislative or contractual relations. In the case of direct investment, the investor has the right to participate directly in the management of the business. According to the World Bank, the real indicator of attracting foreign direct investment (FDI) is the performance index, which is measured by comparing country and total global FDI flows, taking into account the national share in the global GDP. To the authors’ knowledge, global FDI fell by 13% to US$1.3 trillion in 2018. The decline in direct investment was observed for the fourth consecutive year. According to UNCTAD’s analysts, the decline in cross-border investments is associated with the repatriation of foreign income by economic entities to the United States. However, the abolition of taxation on the accumulated foreign corporate income contributed to the growth of mergers and acquisitions (M&As) (World Investment Report, 2019). Global FDI flows are, on the one hand, the increased protectionist measures for foreign investors and, on the other hand, the technological transformation brought about by the Fourth Industrial Revolution. There is no single model that reveals the motives of investment by international corporations. For example, according to Buckley and Casson’s theory, parent companies invest through their subsidiaries that allow them to manage risks while controlling the market. Government intervention in international capital markets, in its turn, creates an incentive for transfer pricing (Dinkar & Choudhury, 2014). The essence of Aliber’s currency award theory, for example, is that weak currencies— in comparison with strong currencies of the investor countries—are the most attractive for investment; this can be explained by their ability to receive a premium on the difference in the exchange rate (Dinkar &

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Choudhury, 2014). While this theory has made a significant contribution to economic science, it does not provide an explanation for the cross-border movement of capital in the developing countries where national currencies of equal strength are used. The theory of industrial organization suggests that direct investments are aimed at scientific and technological developments (Dinkar & Choudhury, 2014). After studying the theoretical aspects of foreign investments, we can conclude that FDI has the following advantages over the portfolio and other investments: ● searching for new markets and reducing production costs; ● improving product quality through increased competition from multinational corporations; ● creating new jobs, and as a result, increasing the purchasing power and income of the population; ● introducing advanced technologies and know-hows, obtaining useful experience of foreign management, project implementation (Mammadov, 2019); ● increasing export volumes and foreign currency earnings; ● maintaining a current account surplus, covering the state budget deficit and alleviating the external debt. Besides, long-term direct investments contribute to the integration of individual countries and regional groupings into the world economy. Thus, FDI is an important development factor affecting the cooperation between national economies. Russia is now suffering from capital outflows as well as underdeveloped financial markets and banking systems, which indicate certain difficulties in using FDI for developing the national economy. The export of capital from Russia amounted to US$24.3 billion in 2017. By the end of 2018, the capital outflow significantly increased to US$63.0 billion (Bank of Russia, 2019). Capital flow contributes to a structural liquidity deficit in the banking sector, which could slow economic growth. Practice has shown that financial and credit institutions do nothing but transform savings into investments. In this regard, balanced

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economic growth can be seen only when financial and credit institutions start to work effectively. Economic agents of developed financial markets actively interact with each other. This allows them to attract long-term financial resources and to invest them in the real sector of the economy. We suppose that private equity funds can be called a key factor affecting all economic actors and attracting investments in the national economy. Private equity fund is a financial instrument used by both transnational corporations and transnational banks to increase the industrial and infrastructure potential of the national economy. Private equity funds play an important role in developing the Russian economy, as FDI inflows help to boost economic development in capital recipient countries. Russian Direct Investment Fund (RDIF) is the largest sovereign fund in the post-Soviet space in terms of authorized capital. This fund aims to attract investments into the leading companies working in the most promising sectors of the economy. The volume of funds raised by RDIF for Russia amounts to US$40 billion. For example, RDIF, as a coinvestor, made a lucrative deal with the Abu Dhabi Finance Department in 2013 to invest up to US$5 billion in major infrastructure projects in Russia (RDIF, 2019). The intensification of RDIF will solve the problem of FDI inflows into the national economy to implement longterm economic development programmes of the national economy by introducing modern digital technology. It is worthwhile saying that banks have entered the digital era because of the trends of the modern economy. A developed digital economy can meet the business needs of businesspeople, for example, reducing costs. In this regard, introducing unified principles of making smart contracts including blockchain and smart technologies will help to reduce transaction costs of both customers and counterparties. It seems appropriate to note the expediency of using blockchain technologies in the field of land cadaster, financial operations, banking, passenger transportation, digital marketing, and project financing, which can contribute to the expansion of banks’ activities, the reduction of project administration, and the introduction of innovative management into banking practice. For example, in real estate transactions, blockchain in the register and the document flow on real estate, and the tokenization of real estate

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(completing real estate transactions using tokens), can both be used. Blockchains are used in financing infrastructure development projects in Sweden, Greece, Georgia, and Japan. Tokenization of real estate is practised in Russia. One such project is the ATLANT platform, which promotes the deals between the parties without additional intermediaries. Sberbank also uses an online platform based on this technology to register real estate transactions. The volume of such transactions is 7 billion roubles. The Ministry of Digital Development, Communications and Mass Communications of the Russian Federation is studying a pilot project that allows using blockchain in shared-equity construction. The study of using digital technologies in the banking sector revealed several significant problems, which include a lack of computing capacity, including graphics cards and other computer tools; limited power supply and electricity costs, as well as imperfect legislative framework and regulation. Addressing these problems contributes to using new technologies to provide the technological platform for the growth of the national economy.

Conclusions/Recommendations The results of the study of actual trends and factors affecting financial markets allowed us to conclude that the Russian Federation is solving very important problems of developing the national economy and improving the welfare of the population in the severe environment of world economic relations. It is important to mention repatriation of capital and withdrawal of profits in various forms from the country, which neither improves the balance of payments nor increases the budget income. In turn, the measures taken by the government of the Russian Federation aimed at the import substitution of goods and services contribute to the positive dynamics of GDP, to the promotion of competition, and to a reduction of the dependence of the national financial system and of the economy from foreign capital—all of this threatens

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both the economic and the political security of any country. Incentives for the development of national innovations based on forming modern platforms for ensuring economic growth have been strengthened in Russia. Under these circumstances, to develop financial markets, it is advisable to develop a set of measures aimed at improving banking products and services. It is important to adopt international experiences of electronic banking to transfer banking technologies and financial products. It seems appropriate to expand mutual investments with the partner-countries of Russia, including transnational corporations and transnational banks of the EAEU, BRICS and SCO. In this regard, it is necessary to improve the conditions for credit and financial institutions and for micro-financial organizations. It is necessary to connect the support of innovations in the financial sphere (Yarygina & Mamedov, 2018). All these measures will attract long-term investments in the real sector of the economy, while also increasing the role of banks and the stock market in developing the national economy. In this regard, it is advisable to develop targeted programmes, to form agencies for attracting foreign direct investments (FDI), including those on a share basis, to create specialized centres in the field of public-private partnership (PPP) aimed at establishing mutually beneficial relations with private investors. One of the most important growth areas of investments is creating collective regional funds of financing. It is also important to form a single sovereign direct investment fund within the framework of the EAEU and BRICS, which will allow attracting and effectively using financial resources in terms of financing and the segregation of market risks. It could be RDIF, which plays a key role in attracting FDI, who may become the initiator of the fund. The development of the project financing sphere will reduce the share of the state in the assets of financial and credit institutions, increase the role of the private sector, and stimulate the development of project financing instruments (crowd investing, crowdfunding, etc.). To ensure the development of digital platforms, it is important to create a legislative framework that promotes the wide use of blockchain technologies in the banking sector, as well as to develop a financial policy,

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that will stimulate the use of innovative management tools in business processes.

References Bank of Russia. (2018). External sector statistics. Available at http://cbr.ru/vfs/ statistics/credit_statistics/iip/55-iip_18.xlsx. Accessed 5 November 2019. Bank of Russia. (2019). Russian financial market development program for 20192021. Available at https://www.cbr.ru/Content/Document/File/87952/fm_ development_program_2019-2021.pdf. Accessed 15 January 2020. Dinkar, N., & Choudhury, R. N. (2014). Selective review of foreign direct investment theories. Asia-Pacific research and training network on trade (Working paper, No. 143, pp. 2–27). EY Report. (2019). Global Fintech adoption index 2019. Available at https://www.ey.com/Publication/vwLUAssets/ey-fai-2019-rus/$FILE/eyfai-2019-rus.pdf. Accessed 15 December 2019. Mamedov, T. N. (2019). Investment climate of CIS countries: International rating assessments and own methodology. Financial economy, No. 9, pp. 260–264. Pertseva, S. Y. (2018). Digital transformation of the financial sector. Innovations in Management, 4 (18), 48–53. Russian Direct Investment Fund (RDIF). (2019). Available at https://rdif.ru. Accessed 12 August 2018. Sedykh, I. V. (2019). Market of innovative and financial technologies and services. Available at https://dcenter.hse.ru/data/2019/12/09/1523584041/Pynok% 2520financovyx%2520texnologiЙ-2019.pdf. Accessed 5 January 2020. Yarygina, I. Z., Mamedov, T. N. (2018). Bank participation in investment cooperation of the CIS, Banking Services, No. 1, pp. 12–17. World Investment Report. (2019). Special economic zones. Available at https:// unctad.org/en/PublicationsLibrary/wir2019_en.pdf. Accessed 5 November 2019.

Paradoxes of Financial Market Institutions: Traditions and Ecosystems Galina Panova

Introduction The transformation of financial intermediaries has become one of the new trends in the financial markets, which manifested itself under the influence of macroeconomic factors, technological challenges (fintech) and the increased regulatory burden on financial and credit institutions after the global crisis of 2008–2009. Traditional banks are gradually changing their classic look and acquiring new features within new business models and ecosystems. Changes in the activities of financial and credit institutions in the context of the fourth industrial revolution are fuelling discussions among scholars and practitioners who argue about the prospects for banks in the near and distant future. G. Panova (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_3

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The current traditional banking business model is to provide services to retail and corporate clients. The range of these operations and services includes opening and maintaining customer accounts, offering them credit products, making settlements and payments, etc. The main problem with this model is that in recent years, in the context of technological transformation at each stage of creating value, a significant number of suppliers of high-quality personalized financial products and services offered to the market at low prices have appeared. It is hard for traditional banks to compete with them and, in order not to lose in the competition to new market participants, they are forced to optimize their product offer focusing on the areas in which they have competitive advantages or strategic importance. Today, traditional banks are concerned that their business could be threatened by the developing financial technology. Fintech companies aim to capture at least 33% of the traditional banking business (http://www.pwc.by/ru/publications/other-publications/edgesblurring.html). According to Citibank’s forecasts, the growing influence of financial technologies may provoke 30% of bank employees’ losing their jobs by 2025 (Digital Disruption: How FinTech is Forcing Banking to a Tipping Pointhttps/Citibank Report, 2016). The global fintech industry is growing rapidly, using technological innovation to capture market share from incumbent market players across many financial service sectors. The main innovative areas of financial engineering include cloud technology, process and service externalization, Robotic Process Automation (RPA), Advanced Analytics, Digital Transformation, Blockchain, Smart Contracts, Artificial Intelligence (AI) and Internet of Things. If until recently fintech was mainly focused on developing such sectors as payments, remittances, direct (P2P) lending and crowdfunding, in recent years there has been an increase in activity of the capital markets, new fintech solutions are emerging and banks around the world have to deal with them. In these conditions, banks are forced to compete with fintech companies, on the one hand, and develop cooperation with them, on the other. Large banks are creating tremendous opportunities for fintech companies, giving them access to global financial markets while transforming their own business processes.

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If we take Industry 4.0, much attention is paid to automation, which allows accelerating product and service development and creating new business models that can increase the efficiency of companies, reduce the time and resources spent. For banks, process automation is no longer an innovation trend; it is an important component of their innovation strategy. Today, they are looking for some new business models as well as transforming the old ones, digitalizing the interaction between business, customers and the state, creating new platform-type companies that rely on a wide variety of partners and customers; it was the ubiquity of the Internet and smartphones that gave rise to such companies. New terms appear in economic science and in practice to define the banking business model, for example, neobanks, hybrid banks, aggregators, platforms, infrastructure providers, etc. According to Accenture, which analysed the modern financial landscape, the banking business today is determined by the following main trends: banks are changing their priorities from cutting costs to finding income; the best neobanks “convert” the benefits of attracting new customers into real profits; medium-sized banks are paying much attention to the issue of mergers and acquisitions; intelligent tools (robots, etc.) increasingly emphasize the importance of people as account managers; open banking allows one to transform databases into information flows preparing the prerequisites for the transition to the purposedriven banking era; banks donate their commission income in favour of building trusting relationships with clients and closely monitor the quality of loan portfolios; the role of cryptocurrencies is changing; young market players refuse to call themselves challengers (Accenture – Platform Banking: A Business Model for the Digital Age, 2018).

Methodology The paper uses comparison methods, benchmarking of market practices and recommendations of international consultants. Among them are the results of research projects (King, 2020) and other theoretical and empirical studies.

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The analysis was based on reports and other materials of the World Bank, Bank for International Settlements, international audit and consulting companies, such as PWC, Accenture, McKinsey, as well as the Bank of Russia, Sberbank, VTB Bank, Tinkoff Bank, Citibank. The main objectives of the chapter are to reveal a modern problem of traditional banks change in the finance industry and to show the way for its further development.

Results If we take the economic literature, banks’ business models are often viewed through the prism of such definitions as sustainable development models, product orientation, risk orientation and customer orientation. However in practice there are already international standards that define the concept of a company’s business model. For example, the International Standard for Integrated Reporting (clause 4B) defines an organization’s business model as “a system for transforming resources through its commercial activities into products and results aimed at achieving the organization’s strategic goals and creating value over the short, medium and long terms”, thus highlighting the key elements of the business model, including resources, commercial activities, products and results (MeҖdynapodnyЙ ctandapt po integpipovannoЙ otqetnocti//International Integrated Reporting Council [‘IIRC’]. dekabpb, 2013). IFRS 9 Financial Instruments describes a business model as the way an entity manages its financial assets in order to generate cash flows. At the same time, three types of business models are distinguished: (a) those focused on holding an asset to collect cash, (b) those holding an asset to collect cash or selling an asset and (c) other business models. The Bank for International Settlements (BIS) uses only a range of products as a criterion for classifying banks’ business models. McKinsey identifies two criteria for grouping banks’ business models: the type of products/services and the way they are sold. In this context, the company’s report “Banks in the changing world of financial intermediation” (KompaniЯ McKinsey, analizipyЯ bydywee financovogo

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pocpedniqectva v otqete « Banks in the changing world of financial intermediation». November 6, 2018) highlights the following promising business banking models: (1) the innovative, end-to-end ecosystem orchestrator; (2) a low-cost “manufacturer”; (3) the bank focused on specific business segments; and (4) the traditional but fully optimized and digitized bank. At the same time, from our point of view, all banks can be conditionally divided into traditional (classical) banks and those actively using innovations. Applying new business models depends on the nature and scale of banking activities, profitability, specialization, competitive advantages, etc. The regulation of their activities greatly influences the choice of business models. After the global financial and banking crisis of 2008–2009, regulators introduced new requirements aimed at maintaining bank’s stability, including those with respect to their capital and liquidity levels. This influenced the profitability of banks and determined the range of products they offered, which inspired new models such as P2P platforms offering an alternative to traditional bank lending methods. New regulatory approaches (e.g. the EU’s Open Banking Initiative— the PSD2 directive obliging credit institutions to exchange customer information with service providers at the request of the customer), initiatives to simplify customer authorization, as well as favourable macroeconomic conditions as well as the widespread use of technology have led to the emergence of new financial intermediaries and increased the need to transform the traditional business model of the bank (Financial Conduct Authority – Strategic Review of Retail Banking Business Models: Purpose and Scope, 2017). On the other hand, the international banking standards set out in the Basel Accords aimed at ensuring the stability of banks require them to create additional capital buffers, thus, increasing the cost of doing business and the displacing highly risky assets outside the banking industry. Other directives (e.g. the MiFID II Directive on Markets in Financial Instruments aimed at protecting investors and standardizing the activities of financial institutions in the EU as well as restoring confidence in the industry) involve changing the bank’s approach to their business strategy in the new environment.

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New Banking Business Models Hybrid and neobank models that are currently successfully operating are quite promising because these banks offer low tariffs, flexible and personalized services, convenient mobile banking, which allows them to attract more and more customers. One of the promising new models is an infrastructure provider for fintech companies and/or banks. The advantages of this model are that it eliminates the need for other companies to participate in activities that are subject to strict regulation, to take on the additional costs of complying with supervisory requirements. New market players choose such a model because they do not have to obtain a banking licence. These banks are highly profitable and can significantly save up by expanding their customer base. Infrastructure provider banks tend to become leaders in national markets, as the number of providers in a given model depends on the minimum efficiency level of the operation scale and, accordingly, economies of scale. Aggregating financial services is becoming a more profitable model for banks. Aggregator banks do not create new products on their own but act as distributors of financial products and services that they receive from their partners or ecosystems. Thus, aggregator banks do not incur the costs of creating products and their costs for compliance with regulatory requirements are significantly lower than for other banks. At the same time, such banks provide customers with access to a wider range of products than if they were trying to create them themselves. In this case, they actually become “virtual advisors” to clients in choosing more rational financial and operational solutions, thereby providing the necessary advice and/or service at the right time, using various communication channels convenient for the client. For many years, the main difficulty hindering the functioning of this model was not the lack of technologies, but the insufficient amount of information. Without access to customer transaction data, it was difficult to provide consulting services. However, this became possible with the development of the regulatory framework, in particular with the advent of the PSD2 directive in Europe, which allows a third party to receive bank data. Currently, Internet platforms can supplement transaction data with contextual information at their

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disposal in order to provide timely and appropriate advice to customers. This model also allows customers to engage in the service, providing them with a wider range of banking operations and services, as well as the ability to effectively manage their funds. Choosing an aggregator model allows the bank to achieve economies of scale by serving a significant number of customers using a single software platform. In addition, the platform creates network effects, since an increase in the number of bank customers expands the range of system partners, who, due to a wider range of products and services, attract more and more new users. Another type of business model is platform. Today, the platformbased business model has been implemented in many areas. In particular, there are advertising platforms (Google, Facebook, Yandex), cloud (Microsoft, Amazon, IBM Cloud), industrial (Mind Sphere—Siemens, Predix—General Electric) and product platforms (Spotify, Yandex.Drive, etc.) (H. Cpniqek Kapitalizm platfopm/pep. c angl. i nayq. ped. M. DobpЯkovoЙ. – M.: Izd. dom BycxeЙ xkoly Эkonomiki, 2019). The key elements of the digital financial infrastructure include platforms for remote customer identification, fast payment platforms, marketplace platforms for financial products and services, as well as new platforms based on distributed ledger and cloud technologies. Open API is the key link in the financial market infrastructure. A platform for remote identification of financial institutions’ clients uses a database of a unified identification and authentication system and biometrics to allow banks to provide remote services. The fast payment platform allows people to transfer money to individuals and legal entities using the maximum number of identification methods, including a mobile phone number, QR codes, instant messengers and other identifiers. The platform for registering financial transactions allows creating and maintaining a single register of transactions in the financial market. Development banking marketplaces has been the trend of recent years. The marketplace allows customers to receive the necessary financial services with clear and transparent pricing in a one-stop-shop mode. For example, a promising payment system is being created in Russia on the basis of a unified payment platform, that will allow banks to

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manage liquidity more effectively. The Bank of Russia is expanding the list of services provided by the National Payment Card System. For example, it is planned that the MIR card will be integrated with non-financial applications (campus, social, student, etc.). Such innovative services as “Mir-Accept” (with self-authentication of the issuer’s client) will be introduced. The National Payment Card System is being introduced among the member states of the Eurasian Economic Union (EAEU). The payment platform for transmitting financial messages is being created using the distributed ledger technology and is intended for transmitting financial messages in the SWIFT format. At the initial stage, this platform will work only in Russia. However, in the future, the Bank of Russia expects to organize the intersystem interaction of the EAEU countries on its basis. All in all, the bank’s business model based on the platform is a promising strategic option since it allows banks to simultaneously achieve network effects and use existing competitive advantages, meaning primarily trust from consumers of banking services, large customer databases, access to inexpensive financial resources and sufficient capital. In addition, banks have many years of experience in collecting and analysing customers’ information, which is necessary for analysing their credit record and cooperate with partners in order to obtain data on consumers of partner’s banking services. The bank’s business model based on the platform usually tends to a closed development model, which is associated with the risks of market monopolization, preventing the emergence of new companies, as well as the risks of preserving the data or even losing key information (e.g. that of cross-border transfers). In view of the above, a more efficient business model for the bank includes a vertically integrated open platform that combines high performance and the bank’s ability to provide high-quality products and services. Banks using this business model can provide a wider range of services and products from third-party service providers, as in the aggregator model, and since the lending institution is vertically integrated and compliant with regulatory requirements, the service becomes more responsive. Another advantage is that the developers of such platforms are constantly improving them to better meet user needs. Banks

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using these platforms benefit from continuous innovation without the need to invest their own resources in non-core technologies and thus free them up to improve the existing products and create new ideas and solutions (Accenture – Platform Banking: A Business Model for the Digital Age, 2018). In addition, functioning on the platform allows credit institutions to use the so-called cross-subsidization (H. Cpniqek Kapitalizm platfopm/pep. c angl. i nayq. ped. M. DobpЯkovoЙ. – M.: Izd. dom BycxeЙ xkoly Эkonomiki, 2019), when one division of the company seeks to reduce the cost of a service or product, while another, on the contrary, increases prices to compensate for the resulting losses. To compete with new market entrants such as fintech and bigtech, banks are creating open channels for delivering products and services while maintaining strategic opportunities. The largest and most successful banks create so-called ecosystems. In practice, the term “banking ecosystem” is interpreted in terms of creating and managing a banking group which includes various kinds of companies (both financial and non-financial ones) offering various financial and non-financial services and goods to the bank’s clients in order to satisfy as many of their needs as possible. Summarizing the existing theoretical and practical approaches and relying on our own research, it seems appropriate to us to single out three main basic business models, which have come to be called ecosystems in recent years. 1. A business model in which solutions offered by large technology companies have priority (e.g. FAMGA—Facebook, Apple, Microsoft, Google, Amazon—in the USA, and BAT—Baidu, Ant Financial, Tencent—in China). In this case, bigtech companies are the heart of the ecosystem. Therefore, this model is called the American-Chinese or “Bigtech” fintech. 2. A business model dominated by solutions offered by startups and new companies which usually specialize in one or more niche offerings. In this case, fintech startups make the heart of the ecosystem. This approach is often called the European model or startup fintech. 3. The traditional fintech includes financial technologies in traditional banks, payment systems and other participants in financial

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markets when classical financial intermediaries form the heart of the ecosystem. It is this business model that prevails in the Russian financial market. Banks, first of all, begin to carry out daily operations (payments for cellular communications and the Internet, rent of premises, utilities, etc.) in the digital mode, and then new products are issued (opening accounts, accepting deposits and issuing loans, issuing plastic cards, etc.). At the same time, with the development of remote banking services, banks not only do not abandon the network of physical offices but also open new ones. For example, VTB Bank currently has more than 1,500 offices, and their number has been increasing in recent years since there are operations that cannot be performed without bank employees (depositing cash by a client into a bank account, obtaining advice on complex structured products, renting safe cells, etc.). At the same time, the bank’s offices are being functionally adapted taking into account the global banking industry digitalization; we can witness the transition to the format of paperless offices where the client confirms the operation and signs everything in the bank’s mobile application in the presence of an employee who creates the document itself and its digital image. In recent years, banks have been actively using the system of financial incentives for their customers, including loyalty programmes, where cashback, bonuses, miles and other preferences the bank provides to its customers for using its programs and partners’ programs are combined in one mobile application and on the bank’s website. The bank’s client saves time and money by receiving on-line information about the products and services he needs at one time or another, and also has the opportunity to purchase them remotely. Thanks to modern technologies, part of the information is provided to the client remotely in a visual format. For example, using virtual reality glasses, bank customers can see a future apartment or other property. Then they can remotely apply for a loan, open a personal mortgage office, get an approval for the loan after which the bank will transfer the funds to the borrower’s account.

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Traditionally, in Russia, there are universal banks and specialized banks, whose activities are focused on any particular types of banking activities. A number of large Russian banks, whose share in the banking sector’s assets is 66%, are leaders in developing new financial technologies and declare their strategy as development “in the ecosystem paradigm” (Trushina & Smagin, 2019). In the economic literature, two main types of banking ecosystems are often distinguished: (1) the ecosystems that satisfy a wide range of customer needs for various goods and services (Sberbank), and (2) the ecosystems that satisfy customer needs in one specific segment (Rosselkhozbank, VTB). For example, the largest bank in the country, Sberbank, began to create its own ecosystem in 2017, when CEO German Gref named IT giants (such as Google, Yandex, Alibaba) the main competitors of the bank (https://www.forbes.ru/biznes/387895-german-gref-transform aciya-sberbanka-eto-vechnyy-process). Sberbank’s shareholders approved a strategy for the gradual transformation into an ecosystem as the technology platform is created and the bank can aggregate an increasing number of services. Since then, the bank has gradually developed into an open ecosystem. In 2017–2019, Sberbank spent US $1 billion (or 3% of profit for this period) to purchase various assets (financial and non-financial) and create an ecosystem. Today, the Sberbank ecosystem includes companies that provide various services to individuals and legal entities, including cellular communications, a credit bureau, a recruiting service, a real estate portal, logistics, online cinema and others. In 2019, Sberbank expanded its business with a number of digital assets, including a joint venture with Mail.ru and a stake in Rambler, as well as the media assets Gazeta.ru and Lenta.ru. Sberbank’s ecosystem includes food delivery companies (Delivery Club) and taxis (Citymobil), a restaurant business (SberFood platform and R-keeper—ERP for restaurants). Sberbank is considering the joint venture with Soyuzmultfilm as an important educational project. It is expected that the capitalization of non-banking business will eventually equal the capitalization of Sberbank itself, which exceeds

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5 trillion roubles. Sberbank strives to become the largest technology company. In 2019, VTB Bank adopted a new strategy in which the task was to create marketplaces and a banking ecosystem in order to make retail services for clients a convenient omnichannel service with a high proportion of digital technologies. VTB will have carried out 70% of the bank’s operations and 50% of sales exclusively via digital channels by 2022. Marketplace creation allows a bank to integrate many services. For example, VTB is currently developing the so-called payroll marketplace, creating housing and automotive ecosystems, developing VTB’s multiservice for e-commerce. The Housing Ecosystem project is being implemented. Its goal is to satisfy all the customers’ housing needs in one window mode: choosing a suitable apartment or another real estate object, conducting a transaction, appraising and registering, insuring, creating a design project for the purchased object, getting help with moving and maintenance of the living space, ordering small services for the house, repairing, etc.; getting a mortgage and consumer loans on the marketplace, etc. VTB’s open partner ecosystem is being created. It offers new services for all market participants, primarily construction companies that sell their facilities, professional real estate agents, as well as other banks. In August 2019, VTB launched a new website for selling collateralized non-core assets that received the name “Commission”. In 2020, it is planned to open a marketplace on its basis. Cars and real estate received from debtors will be put up for sale, options for buying and registering the acquired property will also be presented here. VTB Mobile, the mobile operator of VTB, is presented on the market as a VTB and Tele2’s joint project. SIM cards of this system will work throughout Russia and abroad. Moreover, the joint use of banking and telecommunication products will provide the maximum effect in terms of security, benefits and convenience. Russian systemically important banks that are building their ecosystems focused on serving customers in a particular segment of the financial market include Rosselkhozbank, Rosbank and Alfa-Bank. Rosselkhozbank plans to create a digital ecosystem for small businesses in rural areas, which will include services for selecting seasonal

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workers, receiving veterinary care, digital farm management, expanding sales markets and agritourism. Rosbank plans to develop an ecosystem to support mortgage lending: providing a mortgage loan, access to the services of real estate agents, notaries, insurance companies, as well as services for furniture repair and purchase. Alfa-Bank has been developing its “ecosystem” since 2013 by purchasing financial companies and startups (Alfa Stream, Alfa Leasing, Alfa Finance). Gazprombank is developing a financial supermarket, and Otkritie FC Bank is developing a system of financial services (Otkritie-factoring, Otkrytie-broker). In these conditions, banks are constantly working on improving technologies, trying to improve them in order to provide optimal service for the client in terms of speed, convenience and range of services in digital channels. Obviously, customers will only be left with those banks that can solve these problems.

Conclusions/Recommendations A futuristic view of the future banking is taking shape today. Under the influence of technological innovation, banks and their businesses are changing dramatically. Those banks that have great technological potential use their technological capabilities to search for fundamentally new business models. They analyse the work of aggregators, marketplaces, ecosystems; create technological services for customers, etc. Banks operating in this new paradigm of digital banking are transforming their operations and transforming the financial market landscape as a whole. This study was conducted in order to analyse the current situation and prospects for the development of banks’ business models, as well as the potential market response, taking into account the influence of systemic and individual risks. The main idea of the study was to determine the efficiency, effectiveness and directions of further developing banks’ respective strategies. Studying the experience of digitalizing banking activities has made it

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possible to reflect the modern realities of the developing subjects of the Russian financial market, identify the existing barriers and determine the main directions for the development of bank policies during the fourth industrial revolution. In particular, the approaches of the Bank of Russia (Bank of Russia, 2018) as a regulator of financial markets often cause debate among economists. An analysis of the theory and practice of using the latest technologies made it possible to find an explanation for organizational changes in the banking industry. These changes are confirmed by the rapidly developing digital platforms and bank ecosystems, as participants in these systems perform financial intermediation for households and companies much faster and cheaper than traditional banks. At the same time, along with the advantages of using innovations that ensure more effective functioning of financial and credit institutions, it is also necessary to take into account a significant increase in systemic and other risks. The development of “ecosystems” has both positive and negative aspects. If a growing income and value of banks, a lower cost of attracting customers, growing loyalty, and expanding client base can be attributed to the positive aspects, then the negative ones include a negative impact on the competitive environment, since large banks can restrict the access of other financial market participants to the product and service distribution channels, as well as creating non-market competitive advantages for those organizations that gained access to the network under the bank’s brand, strengthening the position of large banks—administrators of the ecosystem and creating obstacles to the growing financial service providers whose access to the ecosystem was limited. Therefore, the problem of regulating the activities of banks that have chosen a strategy for developing their business in the ecosystem paradigm should be considered from the standpoint of differentiated supervision, since they have to introduce deeper consolidated supervision and regulation since when companies from different sectors are actually merged under a single brand of a bank, new risks arise that can affect the financial stability of the banking group and the financial market as a whole. In these conditions, we have to bridge the knowledge gap between technology developers, bank employees and other participants in the financial market, as well as develop optimal policy options for different

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groups of banks: the regulator, large systemically important banks, as well as small and medium-sized banks, who obviously have to be digitalized. Each bank will obviously choose an individual model. Banks make their choice depending on the competitive advantages, specialization or potential of the model they choose. As a result of the bank transformation, the entire financial market will win, it will become more efficient and significant for customers and society as a whole.

References Accenture – Platform Banking: A Business Model for the Digital Age. (2018, October). https://bankingblog.accenture.com/platform-banking-bus iness-model-digital-age. Bank of Russia. (2018). The main directions of the financial technologies development for the period 2018–2020. Digital Disruption: How FinTech is Forcing Banking to a Tipping Pointhttps/Citibank Report. (2016). https://www.citivelocity.com/citigps/ ReportSeries.action?recordId=51. Financial Conduct Authority – Strategic Review of Retail Banking Business Models: Purpose and Scope. (2017, October). pp. 5–6. https://www.fca. org.uk/publication/multi-firm-reviews/strategic-review-retail-banking-bus iness-models-scope.pdf. Gref, G. Transformation of Sberbank is an eternal process. https://www.forbes.ru/ biznes/387895-german-gref-transformaciya-sberbanka-eto-vechnyy-process. H. Cpniqek Kapitalizm platfopm/ pep. c angl. i nayq. ped. M. DobpЯkovoЙ. – M.: Izd. dom BycxeЙ xkoly Эkonomiki. (2019). – 128 - c. C.34. Handbook of Block chain, Digital Finance, and Inclusion. (2017). Edited by Prof. David Lee Kuo Chuen and Robert Deng. http://www.pwc.by/ru/publications/other-publications/edges-blurring.html. King, B. (2020). Bank 4.0, banking everywhere, never at a bank. Wiley. https:// www.ozon.ru/publisher/john-wiley-sons-limited-143665778/. MeҖdynapodnyЙ ctandapt po integpipovannoЙ otqetnocti. International Integrated Reporting Council (‘IIRC’). dekabpb 2013 g.

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Schwab, K., & Malleret, T. (2020). COVID-19: The great reset. World Economic Forum. ISBN 978-2-940631-11-7. Trushina K. V., & Smagin A. V. (2019). The main trends in the development of the banking system of the Russian Federation at the present stage (Banking services, № 12, 2019, pp. 7–11). https://www.finvector.ru. KompaniЯ McKinsey, analizipyЯ bydywee financovogo pocpedniqectva v otqete «Banks in the changing world of financial intermediation». November 6, 2018 Report.

The Role of Financial Intermediaries in Digital Economy Development (Chapter23) Alla Dvoretskaya, Aibota Rakhmetova, and Gaukhar Kalkabayeva

Introduction The current trends that have emerged in the world economy, which include an increase in globalization processes, the influence of the geopolitical situation on the state and dynamics of development of national economies, an increase in volatility in the world financial and commodity markets, an increase in local and global financial and economic crises, give a clear understanding that the basis of sustainable socio-economic development is the consistency of all sectors of the economy at the same time and the harmony of relationships between their subjects. For A. Dvoretskaya The Russian Presidential Academy of National Economy and Public Administration (RANEPA), Moscow, Russia A. Rakhmetova (B) · G. Kalkabayeva Karaganda Economic University of Kazpotrebsoyuz (KEUK), Karaganda, Kazakhstan © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_4

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countries with emerging markets, this is, first of all, an increase in the efficiency of subjects of intersectoral interaction, which have a strong innovative component. Innovation is shaping a new face of the modern world, which is most clearly manifested in the exponential growth over the past twenty years of the latest technologies, which are carried by human capital. These leading drivers of growth are adequate to the economy at the stage of the new industrial revolution and the next technological order. Today, industrial production using digital solutions (Internet technologies, artificial intelligence, smart houses, smart factories, etc.) is added to the rapidly developing virtual environment that complements reality (online media market, distance learning technologies, etc.). In other words, humanity is going through the fourth industrial revolution, which is essentially a transition from a post-industrial economy to the development and use of intelligent information technologies. The economy is being digitally transformed, driven by waves of increasingly intensified and accelerated innovation. As noted in the World Bank report, “digital technologies allow companies to quickly increase or decrease the scale of their activities, blurring company boundaries and challenging old production models” (World Bank, 2019, p. 3). Among the main hubs of the digital economy, the most intensively and dynamically developing sector of digital financial services stands out. The rapid growth of the financial technology sector is based on the growth of Internet penetration and digitalization processes. Investments in the fintech industry are growing at an outstripping pace, the number of users is growing by 15–20% annually, and the global volume of transactions in key fintech areas exceeded $ 5 trillion in 2019 (Development Centre, 2019, p. 17). Advances in financial technology are making it possible to actively upgrade the range of financial products and services. Actually, the fintech industry is a functional superstructure over classic financial products and services. The development of financial technologies is facilitated by generational changes in the consumer environment, behavioural transformations, technical and mental advancement of modern customers. Innovative products and services are emerging in three basic segments

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(payments, financing, asset management), such as online payment and online transfer services, P2P cryptocurrency exchange, P2P consumer and business lending, B2B payments and transfers, cloud cash registers and smart-terminals, mass payment services, crowdfunding, social trading, algorithmic exchange trading, robo-advising, software applications for financial planning. Some of these digital products are digital versions of traditional solutions, others are fundamentally new opportunities. There is no doubt about the independent and more rapid growth of financial innovation due to the very nature of the functioning of financial intermediaries. A more interesting question for us is: What is the role of financial intermediaries in the development of a real digital economy in modern conditions? Analysis of modern economic literature in terms of the content of the concept of “role” in the economy allows us to single out the following main classical approaches to the interpretation of this concept: ● the “functional” approach—the basis is the identification of the interpretation of the definitions “role” and “function”. Supporters of this approach note that the role of the economic category, first of all, is expressed through its functions (Bregel, 1948; Kosterina, 2009; Kravtsova, 2003; Tschelnokov, 2012); ● the “performance” approach—implies the interpretation of the concept of “role” through a specific result of the activity, as something for the sake of which any actions are carried out. The adherents of this approach note that the definitions “function” and “role” are interrelated, but not identical concepts, since “function” presupposes a set of any actions, and “role” is the result of the implementation of certain functions (Ivanov, 2011; Shrenger, 1961); ● the “genesis” approach—takes into account the separation of the concepts of “role” and “function” due to the fundamental difference in their origin and development. According to Lavrushin O.I. “role” should be understood as what for the sake of which an object arises, exists and develops. In particular, the author notes: “a role is not so much an expression of an objective result of functioning as a purpose … Realization of a role from the standpoint of macroeconomics is

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always an objective process that does not depend on the variety of forms and types of economic categories” (Lavrushin, 2011, p. 33). We believe that the very etymology of the two concepts indicates in favour of the genesis (third) approach. So, in the content of the concept of “role” (from the English role—gender, character and degree of participation in something, measure of influence or meaning of something), the main emphasis is on the nature and degree of influence, and in the concept of “function” (from Latin function—performance, range of activities and duty)—on the act of carrying out any work (Bagudina, 2004). Therefore, in the context of this study, the interpretation of the concept of “role” is manifested in the degree (strong or weak) and the nature (stimulating or limiting) of the influence of financial intermediaries not only on the development of the digital economy, but also on the general economic development (external manifestations). In our opinion, the role of financial intermediaries in the development of digital technologies is manifested in the fact that the financial intermediation sector in a post-industrial society is a giant platform for the introduction of innovative technologies for serving consumers of financial products and services. At the same time, the institutional appearance of the financial sector is radically changing. Leading financial intermediaries are building their own financial ecosystems that allow integrating all financial products, services and services on a digital basis, taking into account the increasing personalization and customer focus of financial relations. The business ecosystem itself is a new type of organizational structure. Modern business, including financial business, is not a closed system, where the input of resources at the entrance ensures the release of products, the provision of services at the exit. It is a set of platforms with open borders. “Platform” financial intermediaries generate value not in the traditional way, through individual products and services (lending, deposits, settlements), but through creating the effect of a network that unites stakeholders and by simplifying interaction within a multifaceted model.

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Within the framework of the business ecosystem, “a single space for storing and using information is being created; unlimited access to resources and products of ecosystem agents and mutually beneficial exchange between them; convenient and safe interaction, interaction, supported by a plurality of techno-technological compatible variations of devices and programs” (Sologubova, 2019). Such an ecosystem outline makes it possible to multiply the competitive position of the business and at the same time fully satisfy the needs of customers. The explosive growth of the global financial technology market is accompanied by a change in its subject structure. The serious expansion of the subjects of the fintech market is a fundamentally new and important change in recent years. Banks as traditional leading financial intermediaries are no longer the main players. The key agents and drivers of the global fintech industry are, in fact, fintech companies—tech startups and large players. Venture capital is an adequate and predominant source of funding for them (more than 70% in the world). Traditional sources (direct investments, mergers and acquisitions) and alternative channels (crowdinvesting, crowdfunding, P2B loans, and sources of development institutions—grants, soft loans) are used complementary (Development Centre, 2019, p. 19). Competitors and at the same time partners of fintech companies are classical financial and credit institutions—banks, payment systems, insurance companies, pension funds and non-financial organizations—carriers of huge client bases with a wide geographic coverage: retailers, telecommunications operators, Internet corporations, smartphone manufacturers and car manufacturers. At the same time, active interaction is being established between non-financial participants in the financial market. There are many examples. So, modern car concerns have projects with fintech companies (Uber, PayCash, FlightCar, etc.) manufacturers of payment acceptance systems for parking/travel/refuelling, with developers of mobile payment services, blockchain startups, with payment systems MasterCard, Visa. Based on the development of the Internet of Things, mass production of consumer electronics with built-in financial services begins to develop. The emerging configuration of the community of financial market entities not only reflects the growing competition between them, but also

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mutually enriches them. The financial industry is modernizing through the introduction of innovative technologies supplied by large technology companies. But at the same time, there is a tendency for bank clients to leave for non-financial institutions. According to PWC data, more than 80% of banks in the world lose their income due to the development of the functionality of fintech companies (Development Centre, 2019 p. 24). Thus, the modern market is increasingly characterized by insufficient marginality of traditional banking operations, the loss of the banks’ monopoly on payment and other services and the occupation of an ever larger market niche by non-bank institutions and fintech companies. At the same time, the development of the fintech market in the face of increased risks associated with the digital economy format must have a serious regulatory basis. It is created and maintained by the regulator of financial markets. However, the role of the central bank as a regulatory financial institution is twofold. First, the central bank is a direct regulator of the actions of supervised financial institutions in the development of financial technologies. In modern theory, digital transformation regulation measures are called “analog complements” of the digital economy. Secondly, it is the direct creator of the digital financial infrastructure, initiating the most important fintech projects as an operating environment for the direct functioning of financial intermediaries. This expansion of the central bank’s functionality in the digital economy is due to the need to moderate the many times more complicated and accelerating processes in cyberspace in the field of payments, settlements, provision of other financial products and services, and to reduce the risk of transactions. This allows us to talk about a serious transformation of the role of the mega-regulator, the activation of its role as a key subject in building a digital macro ecosystem. At the same time, the mega-regulator directly shapes its factors such as technology, access to financing, and regulation. In domestic practice, the mega-regulator creates a special regulatory platform for testing innovative financial technologies, products and services. Its goal is to promptly test hypotheses about the effectiveness of fintech and services, and analyse the associated risks and threats. Piloting will take the form of either testing (without risks to the

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consumer) or a limited regulatory experiment conducted in stages under the control of the regulator. The objects of approbation are learning technologies, biometrics, open interfaces, crowdfunding, cryptotechnologies, robo-advising and initial coin offering (ICO). Thus, the mechanism for managing the powers on corporate clients’ accounts in electronic form has already been tested and received a legal basis. As a rule, the regulator in the financial market is the initiator and moderator of the most important fintech projects, which together constitute the financial infrastructure. Goal setting is about creating convenience not so much for market participants as for consumers of financial services. The creation of a modern digital infrastructure is extremely expensive, and it is beyond the power of individual banks, even the largest ones. Therefore, it is logical that the central bank assumes the infrastructure costs in order to provide players and consumers with equal access to the opportunities of new technologies. Thus, in the digital economy, the functions and role of financial intermediaries are rapidly changing. Financial institutions are in the lead, building financial ecosystems in a competitive environment and at the same time actively collaborating with non-bank financial institutions and non-financial companies. Their activities are being revolutionized by the influence of financial technologies and at the same time optimizing the processes of consumption of financial products and services by the ultimate beneficiaries.

Methodology For a long period of time, there have been discussions in the scientific literature about the role of financial intermediaries in the development of the economy, including the digital economy. In particular, representatives of the institutional school, represented by T. Veblen (1984), D. North (1997) and others, considered the influence of financial intermediaries on the economy parasitic, insisting on state regulatory intervention in economic processes (Nort, 1997; Veblen, 1984). A large number of domestic and foreign authors are devoted to the study of the problems of the development of the financial sector and

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its institutions at the present stage, but we are not interested in the development of the financial sector as such, in its sovereign form, but in its relationship and the strength of interaction with the real in terms of the development of real innovations that act as the basis of digital economy. Representing various kinds of innovations and innovations, innovations reflect not only significant shifts in the structure of the economy, contributing to the progressive development of the economy, but also form the basis for the development of new forms of interaction between financial organizations and innovative enterprises. On this score, the opinion of J. Schumpeter (1982) is known, who in his works emphasized the signs of the dynamic development of society in a nature of innovations (Shumpeter, 1982). The channels of positive influence of the financial sector, which is more deeply rooted in society, consist in the rejection of ineffective business and innovation projects by banks, in the increase in the capitalization of successful issuers, and in the increase in liquidity and profitability of their securities. It is impossible to deny the potential for investment opportunities and accelerated growth based on expanding the range of sources of financing of various types: direct (through securities), indirect (through loans), symbiotic (derivatives, securitized products, crowdfunding). The social impact of the financial sector is also important, its contribution to the implementation of the concept of “inclusive growth”, increasing the financial availability of products for the population and business. So, being the most important structural elements of the modern economy, the real and financial sectors make up its base frame; form the institutional matrix (architecture). Any structural and regulatory changes and reforms in the financial sector in terms of supporting the innovation sector will cause changes not only in the status, behaviour and policies of financial institutions, but also directly affect the dynamics and structure of operations in the innovation sector and, further, multiplying, in the economy in the whole. Thus, the aggregate national economy will acquire a fundamentally different qualitative appearance than in the absence of such reforms in one of the segments.

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But the degree of “enrichment” of the integral system largely depends on the type of influence of the financial sector on the real innovation sector and on the prevalence of a particular model of the financial sector…. In this regard, a scientific case that does not lose its relevance remains the dispute about which financial system is more effective in terms of its structure and impact on the economy—bank-centric or market-centric. The division itself was proposed by Gerschenkron (1962, 1968) and Goldsmith (1969). Many authors believe that due to financial globalization, the clear division of countries into banking and market ones has lost its significance even much earlier, since the second half of the twentieth century. Thus, mixed systems prevail in the modern world—and not only in the cluster of developing countries. We subscribe to this opinion and believe that a drift to the financial sector of a mixed instrumental type is objectively inevitable, even in spite of recurring crises or lack thereof. Modern finance is increasingly relying on hybrid capital raising instruments, which means that financial market entities are becoming complexly structured institutions without the former clear division into banking and non-banking types. In modern conditions, social and personal well-being and competitive positions of the national economy largely depend on the quality of functioning of the innovation sector, growth rates and the availability of monetary resources from the financial sector. Thus, the effective interaction of the innovative sector of the real economy with the financial sector is becoming one of the topical cases for the development of modern society.

Results In order to confirm the hypothesis put forward about the positive influence of financial and credit organizations on the innovative sector of the economy, within the framework of this scientific study, economic and mathematical data modelling was carried out. The analysis of scientific research in the field of studying the problems of the relationship between the financial and real sectors of the economy, using methods

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of economic and mathematical modelling, indicates the presence of a statistically significant correlation between indicators of the development of the financial sector and the rate of economic growth (Ahmed, 1998; Amable, 2001; Baier, 2004; Bekaert & Does, 2005; Levine, 2000, 2002). A feature of our proposed economic and mathematical model is that an attempt was made to determine the influence of the assets of financial and credit institutions on the growth of the innovation sector. For empirical data analysis, we used econometric modelling methods, in particular, correlation-regression analysis with the construction of paired and multiple linear regression models. Computer application Stata 13 was used as a modelling tool, graphical illustration of dependencies was carried out in Excel. Within the framework of modelling the selected indicators of dependence (the influence of financial assets on the growth of the innovation sector), we attempted to determine the degree of the greatest influence of various sources of funding for innovation on the growth of the innovation sector. The sources of statistical data for this group of dependence were statistical indicators from the World Bank database (www.worldbank.data.org), the National Bank of the Republic of Kazakhstan (www.nationalbank.kz) and the Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan (www. economy.gov.kzeconomy.gov.kz) for the period from 1995 to 2018, the choice of which was justified, the data were preliminarily systematized and grouped into groups. In particular, the results of the analysis of the first group of factors (“investments”) showed that there is an inverse relationship between the export of high-tech goods in Kazakhstan and the cost of research and development (R&D). The result obtained confirms the thesis that the quantitative growth of indicators of innovative activity, including the growth of the indicator of expenditures on R&D, does not give a guaranteed impact on the quality of work of the subjects of the innovation sector in the Republic of Kazakhstan and, above all, on the results of their activities. Moreover, investment in fixed assets and foreign direct investment also do not show a positive effect on the resulting trait. This result is not accidental, it confirms the choice of the so-called catch-up development model by Kazakhstani enterprises of the industrial sector,

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according to which the owners of enterprises (both domestic and foreign investors) do not invest resources in innovative developments, but buy ready-made high-tech equipment. Assessment of the influence of factors of the second group (“bank loans”) showed the strongest correlation with the export of high-tech goods indicators of long-term bank lending to legal entities. At the same time, short-term loans from second-tier banks do not have a positive effect on the development of innovations (Fig. 1). This is due to the fact that the terms of short-term lending and the terms of its provision do not coincide with the duration of the full innovation cycle. Taking into account the fact that the indicators of domestic lending to the private sector and long-term lending to legal entities are interconnected very closely. All regression coefficients are statistically significant. At the same time, with an increase in the share of domestic loans to the private sector in GDP by 1%, the share of exports of high-tech goods in industrial exports will grow by 0.49%. Similarly, an increase in the share of long-term bank loans to legal entities in GDP by 1% will contribute to an increase in the share of exports by 1.8%. Within the framework of assessing the influence of factors of the third group (“assets”) on the indicator of the effectiveness of innovation (export of high-tech goods in the total volume of industrial exports) in the Republic of Kazakhstan, the assets of insurance companies and, to a

Fig. 1 Diagram of the dependence of the results of innovative activity on the indicators of bank lending (for legal entities), including in the context of lending terms in the Republic of Kazakhstan. Note Compiled by the authors based on simulation results

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Fig. 2 Diagram of the dependence of the results of innovation activity on various types of financial assets in the Republic of Kazakhstan. Note Compiled by the author based on the results of modelling

lesser extent, pension assets have an impact on the resulting feature. Total banking assets have a weak effect on the result (Fig. 2). With an increase in the share of banking assets in GDP by 1%, one can expect an increase in the share of exports of high-tech goods in industrial exports by 0.33%. In turn, with an increase in the share of pension assets by 1%, the share of exports of high-tech goods will increase by 1.89%. The increase in the share of assets of insurance companies will contribute to the growth of exports of high-tech goods by 29.4% of industrial exports. Thus, despite the still insufficient role of the subjects of the insurance sector in the development of the domestic economy (no more than 1 trillion tenge or 1.8% of GDP), the subjects of the insurance sector, due to the concentration of long-term resources, have great potential for interaction with the subjects of the innovation sector. At the same time, pension assets play an even greater role in the development of innovations here; their share in the structure of financing the venture capital business has reached 25%, outweighing the share of investments of the banking sector in the development of innovation. Undoubtedly, the similar nature of the formation of insurance and pension resources, as well as successful world practice, indicates the prospects for their use. The study of the degree of influence of the factors of the fourth group (“stock market”), characterizing the development trends of the stock market in Kazakhstan, showed that these indicators do not have a significant impact on the indicator “export of high-tech goods”. The paired

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correlation coefficients between these indicators are, respectively, equal. The same result is obtained by a regression analysis of the dependence of innovation on the stock market indicators. Thus, the obtained results indicate the underutilization of the potential of the financial sector and its subjects in the development of real innovations and the economy as a whole.

Conclusions/Recommendations The general volatility in the financial and commodity markets and the instability of macroeconomic indicators today exacerbate the problem of resource availability of the industrial and innovative development of Kazakhstan due to the general decrease in the confidence of potential investors of long-term resources in financial intermediaries within the country, which leads to an increase in the risk and the flow of free funds mainly to the market real estate, currency, investments in other real assets and in the accounts of foreign financial structures. Against the background of the presence in the country of very serious savings from the extraction of minerals, significant accumulations of insurance and pension resources of a long-term nature, the growth of natural resources, the problem of free flow of resources to priority sectors of the real sector and to the development of innovations remains due to the high concentration of political, country, financial, economic and industry risks. In turn, the problem of high risks requires an appropriate restrictive policy of government regulation, which further exacerbates the situation (deployment of an asymmetric spiral). In addition, there is a problem of discrepancy between the duration of the innovation process and the timing of the placement of temporarily free resources by financial intermediaries. As the practice of innovatively developed countries (Sweden, Denmark and the Netherlands) shows, the average duration of the innovation cycle reaches 7–10 years, while the term of placing on deposits in domestic banking practice ranges till a maximum of 5 years. The similar importance of regulatory issues for the course and results of the process of interaction between the subjects of the two sectors necessitates adjusting the current regulatory practice and moving from

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one-sided strict restrictive measures designed for a short-term effect to balanced and preventive regulation designed to achieve long-term multiplier effects. We believe that such a difficult task in the modern conditions of the development of the national economy is insoluble without the proper institutional infrastructure and environment that would support the trajectory of intersectoral interaction in the vector necessary for the economy. In the framework of improving institutional reforms, the models of state regulation developed in the world can be used. Judging by the increasing role of the state in economic processes, the Anglo-Saxon model of regulation is used in Kazakhstan, the basis of which is the influence of the state on the economy through the financial sector, in particular banks (this model is widely used in Canada and the UK). The essence of this model is that the primary assistance of the state is provided to financial institutions, in the hope that these resources will be directed to the development of the economy, including innovation. However, the choice of this model, in our opinion, aggravates the asymmetry in the development of sectors, since the funds allocated by the state are stuck in the financial sector due to risk restrictions. The question arises “How to break this vicious circle?” The answer to this question is given by the second model of regulation—continental (used mainly in European countries), in which the state directly supports the subjects of the real and innovative sectors. If this model is supplemented with a balanced policy of financial regulation, this will allow solving several unresolved issues at once: (1) lowering dependency sentiments in the financial sector; (2) increased competition among financial intermediaries of various types; (3) activation of the presence of financial intermediaries in priority sectors of the economy, which are directly supported by the state, which will reduce industry risks; (4) direct access of enterprises to resources, which increases their solvency; (5) more accelerated development of the digital economy, etc.

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References Ahmed, S. (1998). Financial sector development and economic growth: The South-Asian experience. Journal of Asian Economics, 9 (3), 503–517. Amable, B. (2001). Can financial infrastructures foster economic development? Journal of Development Economics, 64 (2), 481–498. Bagudina, E. G. (2004). Economic dictionary (A. I. Arkhipov, Ed., p. 624). Moscow: Prospect Publishing House. Baier, S. (2004). Does opening stock exchange increase economic growth? Journal of International Money and Finance, 23(2), 311–331. Bekaert, G., & Lundblad, C. D. (2005). Financial liberalization spur growth? Journal of Financial Economics, 77 , (1), 35–55. Bregel, E. Y. (1948). Credit and the credit system of capitalism (p. 671). Moscow: GOSFINIZDAT. Development Centre. (2019). Market for innovative financial technologies and services. National research University Higher school of Economics. Development Centre. Available at: https://dcenter.hse.ru/data/2019/12/09/ 1523584041/%D0%A0%D1%8B%D0%BD%D0%BE%D0%BA%20% D1%84%D0%B8%D0%BD%D0%B0%D0%BD%D1%81%D0%BE% D0%B2%D1%8B%D1%85%20%D1%82%D0%B5%D1%85%D0% BD%D0%BE%D0%BB%D0%BE%D0%B3%D0%B8%D0%B9-2019. pdf. Gerschenkron, A. (1962). Economic backwardness in historical perspective. Cambridge, MA: Harvard University Press Gerschenkron, A. (1968). The modernisation of entrepreneurship. Continuity in history and other essays. Cambridge: Belknap Press of Harvard University Press Goldsmith, R. (1969). Financial structure and development. New Haven, CT: Yale University Press Ivanov, V. V., & Sokolov, B. I. (2011). Money, credit, banks: Textbook (p. 848). Moscow: Prospect Publishing House. Kosterina, T. M. (2009). Banking: educational and practical guide (p. 360). Moscow: EAOI Center. Kravtsova, G. I. (2003). Money, credit, banks: Textbook (p. 527). Minsk: BSUE. Lavrushin, O. I. (2011). The role of credit in economic development. Journal of Banking, 2, 32–38. Levine, R. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46 (1), 31–47.

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Levine, R. (2002). Bank-based or market-based financial systems: Which Is Better? Journal of Financial Intermediation, 11(4), 398–428. Nort, D. (1997). Institutions, institutional changes and the functioning of the economy (p. 190). Moscow: Foundation of the economic book “Beginnings”. Shrenger, Y. E. (1961). Essays on soviet credit (p. 406). Moscow: GOSFINIZDAT. Shumpeter Y. (1982). Theory of economic development (p. 455). Moscow: Progress Publishing House. Sologubova, G. S. (2019). Components of digital transformation: Monograph (p. 147). Moscow: Yurayt Publishing House. Tschelnokov, V. A. (2012). Credit: essence, functions and role. Journal of Money and Credit, 5, 74–77. Veblen, T. (1984). Theory of the leisure class (p. 368). Moscow: Progress Publishing House. World Bank. 2019. World development report 2019: The changing nature of work. Washington, DC: World Bank. 10.1596/978-1-4648-1328-3. License: Creative Commons Attribution CC BY 3.0 IGO.

Internationalization of Financial Markets: World Financial Centres Vitalii Klevtcov and Artem Zamlelyy

Introduction Financial markets and the development of financial and credit institutions are inextricably linked to the emergence of technological innovations (He et al., 2017). The change of technological innovations is continually accelerating and catalysing financial market processes and products. Simultaneously, the development of new technologies is slower and not continuous, which negates innovation (Yermack, 2017). This hypothesis has not yet been properly verified. Thus, the relationship V. Klevtcov (B) · A. Zamlelyy Moscow State Institute of International Relations (MGIMO University), Moscow, Russia e-mail: [email protected] V. Klevtcov Financial University under the Government of the Russian Federation, Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_5

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between technological development speed and the population’s quality of life is an object of scientific interest for researchers of different generations and scientific schools. This interest is only growing, especially in the development of financial markets and financial and credit institutions that produce relevant financial products. Firstly, this is due to the diffusion of financial relations in almost all spheres of society and human life, and, secondly, to the increasing penetration of technological innovations into the financial market. Given the above, it seems relevant to study the internationalization of financial markets and global financial centers.

Methodology The research aims to identify current trends and processes taking place, under globalization and digitalization, in the internationalization of financial markets and the development of global financial centers. The research’s methodological basis is based on theoretical and empirical methods: theoretical analysis, synthesis, analogy, scientific generalization, survey and the results of diagnosing the features of the internationalization of financial markets and the development of global financial centers. The research includes a theoretical review of economic, regulatory and scientific materials on developing the financial market and global financial centers, before conducting an empirical study, systematizing the results and developing recommendations.

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Results Financial Technologies in the Context of the Internationalization of Financial Markets and the Development of Global Financial Centers The competitiveness of a modern company is ensured by the intensive use of the information space, making it possible to make strategic decisions under the influence of an exogenous environment (Fohlin, 2014). Financial relations are part of the government’s policy of regulating financial markets, so the digital economy’s financial target has specific features (Masciandaro and Quintyn, 2016). Given the objective lag of legal norms and economic relations from modern digital technologies, elements may appear that do not correspond to the current economic format in financial markets’ digitalization conditions. Financial technologies are an industry that consists of companies (both technology startups and large companies that improve and optimize the financial services provided) that use technology and innovation to compete with traditional financial organizations such as banks and intermediaries in the financial services market (Ammous, 2018). Despite many financial and technical solutions, internationalization has provided a subjective split in financial markets. There is a growing confrontation between traditional financial and credit institutions and financial market participants with lower costs when selling financial products and financial services. Global financial centers (GFCs) are represented by territories of significant capital attraction, the concentration of institutions that provide a wide range of financial products and financial services, and the infrastructure potential and legislative framework that ensures economic entities can develop. Social concerns, communication, logistics and innovation infrastructure play an essential role in this process. GFCs themselves determine the development of national economic systems and financial markets, ensuring the latter’s internationalization. Based on a theoretical analysis and empirical research, this essay identifies the opportunities and limitations facing GFCs in their home countries. Opportunities are associated with several pathways: ensuring

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the internationalization of the entire economic system, not just financial markets (especially banks that are actively involved in capital flows); reducing unemployment by increasing employment; replenishing budget revenues by increasing tax revenues; and increasing the efficiency of capital redistribution. Restrictions are determined by difficulties in implementing national monetary regulation and risks of capital outflow from the country. We believe that a GFC plays the role of a unique financial haven that can be used to build up capital, and then its owners—under the influence of the phenomenon of home bias—can send it to other countries for subsequent investment or consumption. In this regard, reformatting the business models of financial and credit organizations and measuring the depth of the digitalization of financial markets becomes relevant. Russia does not have a good statistical base to develop an adequate comprehensive indicator of the “depth of digitalization”, but it is possible to note its formation directions. Research projections can include: ● macroeconomic characteristics (the amount of cash used in GDP); ● the attractiveness of investments into digital finance (the volume of investment in new financial technologies); ● infrastructure (the market share of internet and/or mobile banks; the share of banks that use remote identification); ● customer loyalty (the share of banking service users who have access to the internet and/or mobile banking; structural characteristics of operations with terminals); ● the intensity of consumption of digital finance opportunities (the share of loan applications sent via internet banking).

Internationalization as a Condition for the Formation of an Alternative Financial Market The concept of “alternative finance” has a significant degree of ambiguity, and it is possible to distinguish instrumental, institutional and functional approaches in its interpretation.

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The instrumental approach characterizes alternative finance as objects of alternative investments widely used in the risk diversification of investment portfolios: venture capital investments, leveraged buyouts (LBO) or investments in raw materials and real estate. Any form of investment in closed companies and shares of small-cap companies (microcap) can be considered alternative investments (Arestis et al., 2015). The alternative financial market provides additional opportunities for corporate finance. In the institutional approach, the term “alternative finance” refers to the online market for alternative financial services, the perimeter of which is limited to the crowdfunding institute’s range of services. The functional approach allows us to define alternative finance as a new model of the financial system that implements functions atypical for traditional systems (e.g. environmental and social functions). We consider crowdfunding as the process of attracting and providing funds based on online platforms. These platforms allow the full potential of internationalization of financial markets, as they adapt financial products and financial services for potential use almost anywhere.

Diversification of Financial Markets Under the Influence of Internationalization: Russian and Global Experiences The internationalization of financial markets ensures the diversification of financial markets. This can be identified in the emergence of new financial products and various digitalization forms of financial and credit organizations (Haber & Stornetta, 1991). The latter have their own unique set of characteristics: the product market in which they operate, the legal environment, consumers, the structure of the organizations themselves, etc.; thus, each has its digitalization approach. There are three such approaches: 1. Native digitalization: an approach that involves implementing financial activities based as much as possible on digital financial technologies. This does not mean that the organization excludes classical production methods and the sale of financial products, but digital

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ones prevail. Examples include: Tinkoff Bank, Yandex.Money and Modulbank in Russia, Nubank in Brazil and Starling Bank in the UK. 2. Satellite digitalization: a financial and credit organization is switching to new technologies by creating a subsidiary (or brand) that is positioned as based on digital technologies, while the parent organization is not subject to significant changes. Examples include: Tochka Bank (a subsidiary of OTKRITIE Bank, Russia), ImaginBank Bank (created by Spanish CaixaBank), ActivoBank (parent Bank—Millennium BCP, Portugal). 3. Intermediary digitalization: the provision of digital financial services by an organization to other organizations. The company aggregates and technologically improves the services of other organizations. This allows it to carry out fewer expenses (including labour and money) at the beginning of its activity. FINTECH startups use this model, such as TalkBank in Russia, WeChat in China and Simple in the USA. The introduction of modern information and communication technologies has been a channel for internationalization, proven a driver for the development of financial product suppliers, created new financial services and modernized classic ones, changed the consumption of these products, and has had a direct impact on the financial market regulator(s) (Chow & Fung, 2013). This regards the technological improvement of the processes through which the regulator’s traditional functions are implemented and a new function that it begins to perform in the financial sector’s rapid technological development. This consists of the regulator’s direct participation in the production and consumption of new financial products, as well as the improvement (including technological and organizational) of their circulation.

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Banking Business in the Context of the Internationalization of Financial Markets and the Development of Global Financial Centers A field study was conducted by the authors in the period December 2019–February 2020. 255 respondents from different age groups were interviewed, with of 85 people representing each group. The three groups were users of banking services, divided by generation: Generation X (born in 1963–1986); Generation Y (born in 1986–2003); and Generation Z (born since 2003); this made it possible to identify their behaviour in the bank. For people of Generation X, communication with the bank played a key part; banks may not be their choice of a financialcredit institution due to a wide range of banking products and financial services. Generation Y are characterized by the transition to digital technologies, banking products across a wide range, and the need for unique characteristics of the financial services sold. Generation Z, because of their mobility as a way of life, is focused on remote communication with the bank, with the choice of banking products being based on independently set parameters. The results of the study allow us to conclude that in the conditions of internationalization of financial markets—which is intensifying under the influence of digitalization of the economy, demographic shifts, the business models of financial and credit organizations—must adapt to new requirements (a corresponding change in the bank’s behaviour): ● individualized approached (customer orientation when forming the range of financial products and financial services) ● speed of service (change and simplification of processes in all channels of the bank) ● convenience and simplicity of the service (increased attention to loyalty and usability issues). The internationalization of financial markets and global financial centers’ development have accelerated changing concepts: first from Bank 2.0 to Bank 3.0, and then to Bank 4.0.:

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● in the content of banking services—from performing banking operations with an ATM (Bank 2.0.), to eliminating the need for personal visits to bank offices to use banking products and services (Bank 3.0.), to increasing the bank’s role characteristics for the client (bank as a financial consultant (assistant) based on artificial intelligence technologies) (Bank 4.0.); ● in the technological platforms used—from the development of the ATM network and adoption of the internet (Bank 2.0.), to the use of smartphones, cloud technologies, Big Data, and the Internet of Things (Bank 3.0.), to artificial intelligence and augmented reality (Bank 4.0.). Global financial centers (GFCs) are represented by territories of significant capital attraction, the concentration of institutions that provide a wide range of financial products and financial services, and the infrastructure potential and legislative framework that ensures economic entities’ development. Social, communication, logistics and innovation infrastructure play an essential role in this process. GFCs themselves determine the development of national economic systems and financial markets, ensuring the latter’s internationalization. Based on theoretical analysis and empirical research results into GFC’s potentials, both future opportunities and limitations (related to the body’s home country) are identified. Opportunities are related to ensuring the internationalization of the entire economic system, not just financial markets; reducing unemployment by increasing employment; replenishing budget revenues by increasing tax revenues; and increasing capital redistribution efficiency. Limitations are determined by difficulties in implementing national monetary regulation and risks of capital outflow from the country. The reasons for capital outflow in the case of an GFC are a shortage or lack of tools for converting savings into investments, different levels of profit in the economy, or different interest rate dynamics. In this aspect, we believe that the GFC plays the role of a particular financial haven that allows increasing capital, and its formed amount of capital owners under the influence of the phenomenon of home bias (home bias) can be sent to other countries for subsequent investment or consumption.

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Conclusions/Recommendations It is concluded that, in the context of the internationalization of financial markets and the development of global financial centers, a timely adoption of legal norms will change the established order of monetary relations, transform the philosophy of financial relations, legally consolidate the processes of digitalization of financial markets and legitimize financial products and financial services. We found that there is no unique approach to creating an important financial center. To education and the functioning of the IFC, a set of financial and non-financial factors are in operation: these include the level of integration into the international financial market, the capacity of the domestic financial market, its sector development, the sustainability and transparency of the political and tax systems, investment climate, whichever legal framework is required, legal fixation of the rights of investors, the treatment of financial instruments, and financial services and others. Based on the set of proposed metrics, the depth of digitalization within the Russian financial market gives us reason to highlight its insignificant pace. The mega-regulator, based on the Bank of Russia, focused on the legislative registration of digital financial and credit organizations’ status, digital financial instruments and creating a technological platform for bank cooperation. It also seems appropriate to pay attention to the main obstacles to the development of digitalization of the financial market: ● the volume characteristics of cash circulation; ● low investment activity in the field of financial technologies; ● the financial literacy of economic entities that are not only potentially able to consume financial products and financial services but also produce them (companies in the form of issuing primary securities). The formation and development of an alternative financial market— intensified by the internationalization of financial markets and the formation and functioning of global financial centers—raise many debatable questions about the independent significance of crowdfunding

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institutions, their impact on the financial landscape and ways of effective regulation (Bruno et al., 2012). Schumpeter’s hypothesis about the significant role of financial drivers of innovative development is relevant in the context of the formation of crowdfunding institutions. Financial and technological convergence, which contributes to the implementation of alternative financial thinking, distorts the traditional structure of financial markets and creates prerequisites for the expansion of alternative financial mechanisms, blurring the boundaries of economic territories. This is due, among other things, to the development of the internationalization channel—financial technologies and the weak flexibility of financial and credit organizations. Technological innovations as a channel for intensifying financial markets’ internationalization have predetermined its change in infrastructure, participants and products (Philippon, 2016). In order to compete with non-banking organizations that are actively forming an alternative financial market, the authors recommend that banks, in the context of the internationalization of financial markets, ensure mutual integration of communication channels (bank branches, terminals/ATMs, call centres, internet banking, mobile banking) into a single system of continuous communication with the client. Omni Connect will help to harmonize the disparate channels, ensuring their synergy, not competition. For various communication channels between the bank and the client, a specific set of operations is preferred. For bank branches, these include: product consultations; balance checking; cash withdrawals/deposits; loan payments; opening accounts and deposits. Operations for internet banks or mobile banks include: checking the account balance/card; bank account statement; intra-bank and interbank transfers; viewing transaction history; transfer from the account/card; using templates and regular payments, pay cell phone, utilities, etc.; searches for the nearest branch. This ranking is the loading of communication channels between the bank, and the client allows them to rebuild the bank’s business models and free up resources for their more effective use in other communication channels.

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References Ammous, S. (2018). Can cryptocurrencies fulfil the functions of money? Quarterly Review of Economics and Finance, 70, 38–51. Arestis, P., Chortareas, G., & Magkoni, G. (2015). The financial development and growth nexus: A meta-analysis. Journal of Economic Surveys, 29 (3), 549– 565. Bruno, G., De Bonis, R., & Silvestrini, A. (2012). Do financial systems converge? New evidence from financial assets in OECD countries. Journal of Comparative Economics, 40 (1), 141–155. Chow, W. W., & Fung, M. K. (2013). Financial development and growth: A clustering and causality analysis. Journal of International Trade & Economic Development, 22(3), 430–453. Fohlin, C. (2014). Financial Systems. In C. Diebolt & M. Haupert (Eds.), Handbook of cliometrics. Cham: Springer. Haber, S., & Stornetta, S. (1991). How to time stamp digital document. Journal of Cryptology, 3(2), 99–111. He, D., Leskow, R., Haksar, V., Mancini Griffoli, T., Jenkinson, N., Kashima, M. et al. (2017). Fintech and financial services: Initial considerations (IMF Staff Discussion Note, No. 17/05). Masciandaro, D., & Quintyn, M. (2016). The governance of financial supervision: Recent developments. Journal of Economic Surveys, 30 (5), 982–1006. Philippon, T. (2016). The fintech opportunity (NBER Working Paper, No. 22476). Yermack, D. (2017). Corporate governance and blockchains. Review of Finance, 21(1), 7–31.

New Challenges for Financial Market Infrastructure Risk Management Systems Dmitry Panov

Introduction The globalization of financial markets and market integration—along with market volatility, developments in IT and modern communications, changes in the operations of central banks and other regulators (including a transition to consolidated supervision over financial institutions in some countries), and the aim of financial brokers to minimize transactional costs—have led to increased risks and, as a result, to an increased complexity of tools, the emergence of new financial market infrastructure institutions, and more complex financial market structures. The genesis of financial market development is evidence to the notion that they have become a risk arena. Financial brokers expressed a rather natural reaction to the ongoing changes: their answer to market volatility D. Panov (B) Moscow State Institute of International Relations (MGIMO University), Moscow Exchange Group, Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_6

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was financial innovations and infrastructure development. Banking regulation and supervision institutions were not ready for such a development rate at the start of the twenty-first century. Rules of accounting, risk measurement methodology or risk assessment systems had not yet been developed by the time the need for them arose. In the recent past, financial instruments such as derivatives allowed professional financial market players to hedge risky market positions due to the sole fact that derivatives were not registered on the bank’s account in full and, as such, required minimal strain on a bank’s internal funds for any relevant transactions. This is why many banks utilized derivatives exclusively for hedging by simply making use of leverage in order to cover risky positions. However, the situation has changed radically as of late. In the context of the economy’s digital transformation, banks and other financial institutions received new opportunities to practice financial brokering on the basis of technological innovations; clients have become more demanding, laying down newer and higher requirements; and regulators are facing the need to change their ways in order to ensure adequate control and supervision over financial brokers in the context of growing risks, including those caused by the emergence of new business models among financial institutions due to IT development. In such conditions since the global financial crisis of 2008–2009, financial market players have directed their attention to such infrastructural organizations as central counterparties, settlement agents or clearing houses that help to succeed in crisis and volatility management. At the current stage of financial market development, with the “too big to go bankrupt” maxim for the market players no longer undisputable and systemic risks management issues having gone to the forefront, it is imperative that we analyze organizations that are directly aiding markets in meeting new challenges.

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Methodology The studies of Russian and foreign researchers, experts, international organizations, central banks and individual financial organizations— touching upon the issues of financial market infrastructure, its particular institutions and the impact of regulation on economic development to a greater or smaller extent—served as the methodological basis for the study. The study utilized general methods of research: abstraction, going from abstract to specific, typology, induction, deduction, analysis, synthesis and community of the historical and the logical.

Results Development and Regulation of National Market Financial Infrastructure. Russian Case Both globally and in Russia, financial infrastructure organizations traditionally include exchange markets, clearing companies, cash settlement centres, depositaries, payment systems, etc. (Table 1). In recent times, financial market players have been undergoing consolidation in every market segment: banking, investment companies, asset management companies of mutual investment funds, insurance companies, non-state retirement funds, microfinance organizations, consumer loan cooperatives, pawnshops, etc. In many ways this is due to: a. tightened control over market players and financial market regulation coming from, above all, the Bank of Russia. This results in the growth of transaction expenses for meeting all of the statutory requirements and limitations. This measure is aimed at elevating financial market players’ reliability rates, protecting the rights and interests of financial services’ consumers, and at identifying and expelling unconscientious players from the market; b. tight competition among market players;

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Table 1 Major Russian financial market players in 2014–2020 (by the start of the year) Financial market player category Brokers Dealers Trustees Investment advisers Depositaries Registrars Asset management companies for mutual investment funds Non-state pension funds Microfinance organizations Consumer loan cooperatives Agricultural consumer loan cooperatives Pawnshops Housing savings cooperatives Credit record bureaus Debt collection agencies Specialized depositaries Insurance companies and brokers Loan organizations Registered stock exchange investors (individuals and corporations)

2014

2015

2016

2017

2018

2020

885 888 783 –

803 811 708 –

616 633 520 –

436 469 328 –

380 420 272 –

290 319 202 69

616 37 402

573 39 395

492 39 371

389 35 330

347 35 303

276 32 269

120

120

101

71

66

47

3,865

3,992

3,675

2,497

2,216

1,774

3,288

3,226

3,462

2,183

1,844

1,525

1,617

1,661

1,714

1,182

927

673

– 69

– 66

– 62

– 56

4,787 45

3,599 50

25

26

21

16

17

11

–

–

–

–

177

294

44

38

39

39

31

26

N/d

566

478

358

308

255

838

820

706

598

561

439

874,443 983,968 1,046,049 1,160,914 1,373,463 3,933,152

(continued)

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Table 1 (continued) Financial market player category Loan rating agencies and their branch offices

2014

2015

2016

2017

2018

2020

9

9

9

2

5

7

Source Made by the author based on data provided by “DECART” law firm. https://idekart.ru/articles/uchastniki-finansovogo-i-mikrofinansovogo-rynkav-2020-chast-2

c. cost optimization for sustaining individual market players acting as part of large financial and manufacturing holdings and state governance, ensuring supervision and regulation of the financial market; d. international sanctions of the USA and other countries imposed on Russia, leading to a decline in GDP, which, in turn, leads to erosion of purchasing power and a decline in the population’s living standard, as well as the value of the financial market shrinking and reducing; e. the economic crisis caused by the coronavirus pandemic. Under the influence of the aforementioned factors, the return rates for financial market businesses go down, which forces many to consolidate or leave the market either by themselves or under pressure from the Bank of Russia as a result of the supervisory measures taken by it. On 21.12.2018 the Federal Act of 20.12.2017 №397-FA “Amending the ‘Securities market’” and Article 3 of the “Self-regulated organizations on the financial market Act” entered into force, introducing a new type of trade on the securities market performed by investment advisers: investment consulting. Investment consulting is the provision of consulting services relative to securities, transactions therewith, and/or entering into derivative contracts by means of providing individual investment advice. Investment advisers may only be juridical persons established in accordance with the laws of the Russian Federation, or a sole proprietor acting as a member of a self-regulated organization (SRO) on the financial market consolidating investment advisers, which is included on the Uniform Investment Advisers Register overseen by the Bank of Russia. There are currently two investment adviser SRO active (NAUFOR and NFA). The investment consulting market formed

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over 2018–2019. The Bank of Russia has already included 69 investment advisers on the register with a big proportion of them already active on the financial market prior to inclusion (professional market players, asset management companies for mutual investment funds, loan organization). In recent years, an upward trend in the number of both registered and active investors on the stock exchange of the main trade platform in Russia (Moscow Exchange Market Plc. (MOEX)) has been observed, which proves that there is demand among investors for stock exchange instruments. This is mainly the result of two factors at play: (1) in 2015 new legislation entered into force pertaining to concessions in individual investment accounts taxation; according to the Moscow Exchange Market, as of 01.10.2019, the number of registered individual investment accounts came up to 1.17 million, considering that only 598 thousand were in place by the end of 2018 and only 302 thousand by the end of 2017; (2) the Bank of Russia’s gradual interest rate cut to 4.25% (starting from 27.07.2020) leads to commercial banks cutting their savings and loan interest rates at the same time. As a result, the population’s interests shift from bank savings to alternative investment tools with higher profit margins. A consistent trend may be observed in the sense that the number of microfinance organizations is decreasing due to tighter regulatory and supervisory measures employed by the Bank of Russia in the light of frequent individual loan debtor rights and interests violations upon overdue debt recovery. With the entry into force on 01.01.2020 of the Federal Act of 02.08.2019 №259-FA “On attracting investments with the use of investment platforms and on amending separate legislative acts of the Russian Federation” the financial market saw the rise of a new player—investment platform providers (so-called crowdfunding platforms). The act contains the definition of an investment platform: an informational system on the “Internet” information and communications network used for making investment contracts with the help of information technologies and technical devices, access to which is provided by the investment platform provider. The Bank of Russia oversees the activities of investment platform providers.

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In accordance with the Russian laws currently in force, financial brokers are defined as follows. ● Listing authority (exchange market): a person providing onexchange trading services on the commodities and/or financial markets acting under an exchange market license or a trade system licence. On-exchange trading is commenced regularly in compliance with the set regulations providing for listing procedures for the purposes of entering into contracts of sale of goods, securities, foreign currency, repo contracts and derivative contracts. Current financial markets provide players with an opportunity to conclude both bilateral trade contracts and to utilize different exchange markets and OTC trade systems. Exchange markets see the conclusion of contracts with relatively standard instruments with a large number of parties which enables their market value to be efficiently determined. One of the exchange instruments currently on the rise is exchangetraded funds (ETFs or exchange mutual investment funds) which basically allows investment portfolios to exchange value, each of which may possess its own market value or may be even exchanged separately. Transactions, made either independently or with the help of exchange infrastructure, proceed right to the execution stage, the responsibility for which is now born by the clearing infrastructure— clearing houses, central counterparties, depositaries and settlement organizations. The latter are usually banks and non-bank lending institutions. OTC trade systems are generally used for making transactions with over-the-counter liquidity instruments (currency, bonds) or for making transactions with assets without influencing market value (dark pools). Non-standard instruments customized for the needs of an individual client are often used by market players directly between each other, which, in particular, requires each and every one of them to exert additional effort to assess and manage the potential risks.

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● Depositary: a professional securities market player listed as a depositary, i.e. providing safekeeping services of security certificates and/or recording the interests in securities and transfers thereof. Depositaries providing settlement services for transactions made during tender procedures overseen by listing authorities (subject to agreements with the aforementioned listing authorities and/or with clearing organizations providing clearing services for such transactions) are called clearing depositaries. The central depositary is another important figure in the financial infrastructure: a clearing institution in the securities market infrastructure traditionally employed to dematerialize and immobilize securities on western markets, also playing the role of a securities clearing centre. Central does not mean “the only one” within a particular jurisdiction. Central usually means a central clearing institution in a particular national or international securities market segment. The need for instituting a central depositary arises due to an increased number of tenders and a practical necessity of transitioning to a non-certificated recording system for interests in securities. The appearance of the central depositary leads to a rise in liquidity and a reduction of costs for clearing services thanks to transactions being made by all market players within a single post-trading platform. In Russia the central depositary is responsible for the following: – Setting up depositary accounts for securities rightsholders, securities trustees and nominee holder accounts for depositaries; – Setting up depositary accounts for clearing services; – The safekeeping of issued securities certificates coupled with mandatory centralized safekeeping. It may also provide additional services such as clearing, information disclosure to issuers and other persons, assigning identification codes to securities, or transaction settlement. ● Registrar: register holder acting on behalf of the issuer or a person liable on the securities. A registrar may be a professional securities

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market player acting under license to keep a ledger or, subject to statutory provisions, other professional market players. Shareholder register keeping may be performed only by juridical persons. A person in charge of keeping the register is called a register holder. The registrar may not enter into transactions with securities contained in its register. ● Payment system: a consortium of organizations interacting in compliance with the payment system guidelines for the purpose of conducting monetary transfers; the system includes the payment system provider, the payment infrastructure services provider and payment system members, out of whom at least three organizations are monetary transfer service providers. ● Clearing organization: a juridical person that may perform clearing, i.e. provide clearing services in compliance with the clearing guidelines set forth by the clearing organization registered according to the procedure set out by the Bank of Russia under the appropriate licence. ● Central counterparty: a juridical person acting as one of the parties to all the contracts obligations under which are subject to inclusion into the clearing pool. Currently, the centre of attention is clearing organizations and central counterparties. The ever-growing interest in central counterparties arose after the global financial and economic crisis of 2008–2009 as they managed to successfully survive in rather unwelcoming conditions that have made an impact of a large number of financial institutions: asset management banks, insurance companies. Clearing houses have lived through a harsh period; however, no severe default occurred in this segment. Moreover, they greatly contributed to settling one of the biggest defaults (e.g. the Lehmann Brothers case, one of the largest investment banks in the world at the time). Centralized clearing involving the Central counterparty is becoming more and more popular thanks, in no small part, to government regulators providing incentives to conduct such transactions, having assessed the efficiency of the central counterparty in terms of minimizing systemic risks in the economy.

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Market trade involving the central counterparty allows for more efficient price-making thanks to eliminating (or, at the very least, levelling out) loan risk premiums between players that would otherwise be on equal footing on the market. The central counterparty, acting as the vendor for all the purchasers out there on the market and as a purchaser for all the vendors, replaces every player’s loan risk for with its own. At the same time, the central counterparty provides default management services: should one of the players fail to perform their duties, the central counterparty provides settlement for the party acting in good faith on a mandatory basis. The constant provision of such services requires that the central counterparty structures its own unique risk management systems. As a result, the financial market players receive a number of advantages: the guarantee that each player acting in good faith will receive what they are owed; reducing the risk management burden for players; increased and efficient use of financial assets and transactional costs reduction (thanks to more efficient price-making). However, the coin has two sides: there is also a mandatory requirement for every party involved with the central counterparty (broker/party to a contract; risk-taker/ risk management; clearing and settlement; securing the stability of the financial market) to provide collateral (group and individual). This leads to an additional burden on liquidity and costs to support the required level of transaction securitization, which allows the use of such infrastructure only on relatively developed financial markets. It is important to underline the possibility of combining the various infrastructures of the financial market. For instance, the roles of listing authorities or depositaries are often carried out in combination with that of a clearing organization. With that, one has to keep in mind that each type of organization has its own set of risks and efficient methods of managing such risks. In combining the roles of different financial brokers, focus should be given to the special risks inherent in such organization; one also has to ensure that no conflict of interests exists within the organization in the light of combining different roles. The issue of sufficient resources and expertise for performing individual infrastructural tasks should also be taken into consideration.

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However, the financial market, not unlike modern life as a whole, is constantly developing. New instruments and organizations of financial infrastructure are emerging: repositories register and keep an independent list of terms of contracts between market players; marketplaces are electronic platforms for making contracts without visiting a market player’s office; other companies provide financial services on the basis of new information technology (blockchain platforms, cryptocurrency exchange markets, fintech companies and other companies licensed to conduct particular financial transactions). This means that the demand for such services remains high among financial market players, which presents an optimistic outlook for the future of efficient financial markets, satisfying the various needs of their players.

Global Risk Management Practices for Financial Market Infrastructure During the Corona-Crisis of 2020 Financial markets react to all events caused by political, economic, and ecological factors. In times of crisis the impact increases and is frequently felt on a large number of financial markets and in the global economy. This was observed during the COVID-19 pandemic as well. Due to uncertainty on the markets, volatility reached critical levels, which had its effect on rapidly decreasing oil, stock, and interest rate prices. At the same time, loan spreads expanded. In these unprecedented times of market volatility, financial market players had to efficiently manage their risks. Markets with a centralized clearing system in place once again proved to be safe havens for market players in times of stress. The coronavirus outbreak and measures to prevent its spread endangered local and global economies. The Organization for Economic Cooperation and Development (OECD) issued a warning on the 2nd of March 2020 that “the global economy is in danger” and predicted that “the annual global GDP growth rate will fall to 2.4% in 2020 from the already rather poor 2.9% rate of 2019; moreover the first quarter of 2020 may see negative growth rates” (OECD, 2020).

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Being an element of the financial market infrastructure, central counterparties have contributed to sustaining and securing financial markets during the crisis. In particular, central counterparties have provided market players with an efficient and valid forum for risk management while ensuring transparency and operational reliability. This was occurring despite significant operational issues linked to response measures against the spread of the coronavirus, as well as to critical instability levels. Central counterparties recorded a significant growth of variance margins due to observed market movements; however, they were in a position to process these payments as well as duly calculate large transaction volumes. Whereas variance margins record current risk levels of a market player’s portfolio (with central counterparties making the exchange between players easier), the initial margin is retained by central counterparties in order to cover potential future effects on players’ portfolios, with the former using a 99% confidence interval at the very least. Central counterparties formulate their claims to the initial margin in order to cover various potential market shifts; however, market shifts encompassing “extreme but real market environments” have to be taken into account when calculating the central counterparty’s Default fund. Due to extreme volatility levels encountered by central counterparties, the majority of them are forced to provide marginal requirements. Central counterparties aim to find an appropriate balance between reaching decent margin coverage levels and minimizing the risk of procyclicality. Upon reaching this balance, central counterparties are to take into consideration the availability of proper coverage while at the same time avoiding unwanted pro-cyclical changes to initial margin claims relative to observed market volatility rates. As a result, central counterparties have once again shown that they provide security and stability of financial markets, especially in times of crisis. The analysis of central counterparties during the global financial crisis of 2008–2009 and the coronavirus pandemic of 2019–2020 has shown that in both cases they were responsible for market and operational risks; they also minimized loan and liquidity risks, i.e. they fulfilled their purpose despite exceptional circumstances (large transaction volumes and numbers, high financial market volatility rates).

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Extreme volatility rates were observed during the coronavirus pandemic and, in many cases, they mirrored or even surpassed volatility rates observed during the global financial crisis of 2008–2009. In the times of the COVID-19 crisis of 2020, the following trends were observed: ● Stock demonstrated a sustainable increase in volatility according to the VIX index that amounted to 13.46 in January of 2020 and then went on to reach its historically highest rate of 82.69. Similarly, the S&P500 index peaked in February 2020 with over 3,300 points and then proceeded to fall by over 1,000 points in a month’s time. ● Interest rates in almost all countries went down compared to pre-crisis rates. In particular the changes in interest rates in the USA and the UK proved comparable to those observed during the crisis of 2008–2009. ● WTI futures prices plummeted in mid-April and reached negative values after a slow gradual decline since early 2020. ● The CDS market saw extreme growth rates and a period of significant risk premium increases. The relative expansion and the tightening of the spread were twice as large as those observed during the financial crisis of 2008–2009. Despite market volatility, central counterparties managed to overcome it and continue to provide an efficient risk management platform for market players. A reliable and sustainable operational environment is key in times of market crisis as players strive to trade and make payments in order to manage their risks more efficiently in light of the changing market environment. In is imperative that the day-to-day routine of central counterparties involved early risk prevention measures and financial market risk management, especially in troubling times. During the acute phase of the COVID-19 crisis these requirements were fulfilled unconditionally which allowed central counterparties to ensure additional stability and security on the financial market. They structured their anti-crisis management systems and implemented daily procedures

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aimed at ensuring security and sustainability of financial markets, particularly in times of crisis. These approaches may differ for different central counterparties but they usually include the following measures (ESMA, 2020; Eurex, 2020): ● ● ● ● ● ● ● ● ●

Netting and risk offsetting by means of multilateral clearing. Calculating and assessment of claims to variance and initial margins. Variance margin settlement. Stress tests for determining the sufficiency of financial resources in order to cover events of default for clearing parties (e.g. “two default coverage” claims). Calculating collateral discounts. Keeping of the invested margin and monetary investments. Risk monitoring, including interest risks. Control over observance of regulatory requirements, limits and limitations currently in force. Issuing annual reports on transactions, changes and risk rates.

A case study has shown that during the COVID-19 crisis central counterparties remained fully operational, offering reliable trading platforms and centralized clearing services to their clients. Market parties in interest (including the central counterparties themselves along with market players) acknowledge the need to keep markets open, which would allows players to efficiently and effectively manage their risks. In times of the COVID-19 crisis markets did not simply remain open, but trading and clearing went on unimpeded; not a single member of the largest central counterparty world organization (CCP12) suspended or delayed their transactions. On the contrary, some CCP12 members even extended their clearing systems’ service hours for a specified period of time in order to help market players to manage the general burden of the conducted operations. Suggestions to cut the working time of the financial market—or even to close financial markets, as proposed by high-ranking government officials—were decisively rejected by market players and trade associations. For instance, it was declared in the US that “financial markets are a critically significant infrastructure… and they continue to function as

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planned notwithstanding the instability caused by the coronavirus… market prices allow millions of consumers and businesses to make rational decisions in terms of purchasing, selling, producing or investing within the framework of the entire economy” (CME, 2020). During the COVID-19 crisis clearing volumes went up significantly. In March 2020 they reached record rates. Upon comparing asset types clearing volumes in agriculture, in the energy sector, and those of stock and precious metals indices showcased record growth rates. For example, the stock market saw the rise in overall volume of transactions subject to clearing by 146%. Central counterparties require collateral for transactions in order to cover potential futures risks of clearing parties’ portfolio in the form of initial margin and default fund claims. These claims protect central counterparties from future risks in case of the clearing parties’ default. The central counterparties ease variance margin exchanges (daily, at the very least) which reflects the changes in parties’ portfolio market prices. This is how these operations look like broken down: the variance margin for the clearing party’s portfolio, the price of which has gone down, is to be transferred to central counterparties with directions to transfer it to the clearing party, whose portfolio value has gone up. Central counterparties organize variance margin exchanges (usually on a daily basis) which minimizes risk accumulation in the system thanks to reassessing the clearing parties’ portfolio values. Moreover, initial margin and default fund claims will differ depending on the market environment. Taking into account the unusual volatility observed during the COVID-19 crisis, it is imperative to note the different objectives of using initial margins and default funds. The initial margin is designed to cover shifts in market prices (including those observed in times of crisis) and is to correspond to the 99% unwinding risk coverage standard. At the same time, default funds act as mutual security funds designed to cover damages in excess of collateral provided by a clearing party acting in bad faith in “extreme but probable market conditions”. Taking into consideration the objectives and the structure of initial margin and default fund claims, the central counterparty will inevitably require additional initial margins and will record inadequate security levels resulting from unusual volatility levels observed during the COVID-19 crisis. During this crisis

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central counterparties recorded daily volatility spikes which validate the practical need for a gradual increase in initial margin claims. Besides, as insufficient margin levels are quite expected due to targeted 99% coverage, the volatility levels currently observed may also be presented as “extreme but probably market conditions”. Moreover, average variance margin volumes observed during the COVID-19 crisis are proof of significant daily shifts in portfolio market values. The central counterparties’ risk management practices (more specifically—margining) were once again put to the test during the COVID-19 crisis and proved their efficiency. Shifts in initial margin levels were performed in such a manner so that the pro-cyclicality impact was lessened while appropriate security levels were maintained in times of unusual daily volatility. At the same time, central counterparties recorded significant variance margin volumes in order to cover the severely fluctuating current portfolio value. For instance, the Bank of England noted that “the peak single-day initial margin increase was significantly lower than the peak single-day variance margin increase during the crisis which occurred partly due to reasonable measures taken by central counterparties before the crisis, having avoided extreme initial margin decreases during the good times and prevented big and unexpected spike-like marginal claim shifts as market volatility begins to grow” (BoE, 2020). In such conditions the central counterparty is to find a balance between managing pro-cyclicality and sustaining sufficient security levels, especially in times of crisis (as was the case during the COVID-19 crisis) in order to minimize the contracting party’s risks. On the other hand, clearing parties are to have enough resources at their disposal in order to balance out variance and initial margin claims on volatile markets. The Bank of England, in acknowledging this fact, declares that “… taking into account that clearing and margining are important factors serving to minimize systemic risks, the answers may lie, to a great extent, in financial market players understanding how margin claims may change in times of stress and remain sustainable enough in order to manage the relevant liquidity pressure factors” (BoE, 2020). With that said, despite the critical instability, central counterparties remained sustainable during the COVID-19 pandemic, as they did back during the global financial crisis of 2008–2009. Among the CCP12

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members only one instance of clearing service suspension was noted: Ronin Capital LLC, a clearing party on the CME and FICC, a DTCC subsidiary. Ronin Capital LLC, a Chicago-based private trading firm, did not fulfil the capital requirements within a week’s time starting from 16th March 2020. As a result, on the 20th of March 2020, CME announced that Ronin Capital LLC’s portfolios, previously subject to clearing by CME, were successfully sold at auction. CME managed to resolve the situation without any damages for the CME default fund, and moreover, neither clients nor other clearing parties were affected. FICC managed to wrap up and liquidate Ronin Capital LLC’s monetary positions without affecting the Default fund or the general protection level structure in any way.

Conclusions/Recommendations The study of financial market infrastructure development in Russia and abroad enables identifying better, advanced practices, while not forgetting the need for reasonable risk management in new and ever-changing conditions. In this regard, the one practice that seems the most useful is the publishing by many financial infrastructure institutions of public disclosure documents pertaining to qualitative and quantitative information on their business. The information contained in such publications makes it possible to compare particular infrastructural elements with its counterparts and the standards and benchmarks adopted in its sphere. Assessment of such information may serve as quite an efficient means of assessing the risks taken by market players upon conducting transactions with the help of a particular infrastructure institution. Central counterparties played a key role both during the global financial crisis of 2008–2009 and during the COVID-19 crisis. Despite increased volatility, central counterparties allowed local and global financial market to avoid severe losses. Clearing volumes have reached record height, which, however, did not hinder the sustainability of central counterparties. Plans to ensure their uninterrupted activity were to have been implemented over a long period of time. However, in spite of

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rather short implementation deadlines, sustainability, accessibility and stability of current business and clearing operations have been achieved, as well as those of their IT infrastructure. Some central counterparties even reported higher actual main system availability rates compared to the prior period. The initial margin was incrementally increased to required levels in order to secure coverage rates up to no less than 99% in most cases, as per the back-testing results. Contrary to this, the observed increase of the variance margin proved to be significant, reflecting large-scale daily price fluctuations observed on the market. Even though default fund volumes also saw increases in some cases, the only reason why it was measurable, appropriate and predictable was the transparency of methodology used for setting up the funds. As a result, central counterparties found a balance between managing pro-cyclicality and sustaining the required securitization levels for minimizing the contracting parties’ loan risks. Many improvements to central counterparties’ regulation and their risk management practices have been implemented over the last decade, after the global financial crisis, which served to increase their sustainability. Thanks to these improvements, central counterparties successfully overcame extreme volatility rates and higher clearing volume during the COVID-19 crisis. Central counterparties became an essential component in supporting financial markets ensuring sustainability, security and stability, offering efficient and effective risk management places to market players. Understanding that it is cooperation that is key to solving many global issues (e.g. the crisis caused by the spread of the coronavirus), it is imperative that we continue to ensure transparency and uninterrupted financial market activity in the future, especially in times of crisis. The effects of market closure would have been too grave for local and global financial markets and economies. Presently and in the future, central counterparties are to improve their margining models, stress testing methodologies, and default management rules in order to prepare for the

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next crisis. Despite central counterparties having attained a good reputation during the COVID-19 crisis, it is necessary to continue to develop risk management in consideration of new market conditions.

References Bank of England. (2020, June 9). Financial system resilience: Lessons from a real stress. Available at: https://www.bankofengland.co.uk/-/media/boe/files/spe ech/2020/financial-system-resilience-lessons-from-a-real-stress-speech-byjoncunliffe.pdf?la=en&hash=68025EDB90D936B24560429761646BFEA E2D2D74. BIS. (2003). A glossary of terms used in payments and settlement systems. Available at: https://www.bis.org/cpmi/glossary_030301.pdf. BIS. (2004). Recommendations for central counterparties. Available at: https:// www.bis.org/cpmi/publ/d64.pdf. BIS. (2010). Market structure developments in the clearing industry: Implications for financial stability. Available at: https://www.bis.org/cpmi/publ/d92.htm. BIS. (2012). Principles for financial market infrastructures. Available at: https:// www.bis.org/cpmi/publ/d101a.pdf. CME Group. (2020, March 17). CME group statement on U.S. treasury secretary Mnuchin proposal to shorten trading hours. Available at: https://www.cmegroup.com/media-room/pressreleases/2020/3/17/cme_ group_statementonustreasurysecretarymnuchinproposaltoshorten.html. ESMA. (2020, June 28). Functional definition of a central counterparty clearing house (CCP). Available at: https://www.esma.europa.eu/file/5752/download? token=1Icjakov. Eurex Clearing. (2020, June 28). Post-trade risk control . Available at: https:// www.eurexclearing.com/clearing-en/riskmanagement/system-based-risk-con trols/post-trade-risk-control. Norman, P. (2011). The risk controllers. London: John Wiley & Sons. OECD. (2020, March 2). Coronavirus: The world economy at risk. Available at: http://www.oecd.org/berlin/publikationen/InterimEconomic-Assess ment-2-March-2020.pdf. Pirrong, C. (2011). The economics of central clearing: Theory and practice. Houston: ISDA.

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WHO. (2020, February 11). Novel Coronavirus—Situation report. Available at: https://www.who.int/docs/defaultsource/coronaviruse/situation-rep orts/20200211-sitrep-22-ncov.pdf?sfvrsn=fb6d49b1_2.

Federal Laws FedepalbnyЙ zakon ot 22.04.1996 №39-FZ (ped. ot 20.07.2020) « O pynke cennyx bymag » . FedepalbnyЙ zakon ot 07.02.2011 N 7-FZ (ped. ot 27.12.2018) “O klipinge, klipingovoЙ deЯtelbnocti i centpalbnom kontpagente”. FedepalbnyЙ zakon ot 21.11.2011 №325-FZ « Ob opganizovannyx topgax » . FedepalbnyЙ zakon ot 07.12.2011 №414-FZ (ped. ot 20.07.2020) “O centpalbnom depozitapii”.

Payment Systems in Digital Economy Aleksei Bolonin and Vladimir Balykin

Introduction Innovative financial technologies have changed the transactions related to settlements and payments and have created new mechanisms and payment system processes. The technologies for accounting for the movement of money in the accounts of participants in the economic system as a measure of value and means of payment have changed significantly. The main changes have affected the speed of transactions, reduced costs and commissions, as well as new participants in payment and settlement relations, methods and instruments of payment, have appeared (Pertceva, 2019). In this chapter, a payment system is understood as a set of institutions, instruments and procedures used to transfer funds between economic agents to pay off the arising obligations (Krivoruchko, 2013). The A. Bolonin (B) · V. Balykin Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_7

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participants’ monetary obligations arising from their economic activities are ensured by the institutional mechanisms and infrastructure of payment systems, as well as a variety of payment instruments. Such a system of elements that ensure the movement of value between payment participants can be called a “traditional” electronic payment system. However, the technology has given rise to systems in which we can move value and make payments by virtual accounting units within cyberspace. Such payment systems can be called virtual payment systems.

Methodology The infrastructure mechanisms of traditional payment systems include operational, clearing and settlement systems, which allow classifying all payment systems serving the traditional or real economy, according to the degree of completing the settlements in real-time (Real Time Gross Settlement System, RTGS) and those with deferred execution, i.e. there is a time interval between the start of the operation and its execution (Deferred Net Settlement System, DNS). The second important criterion for classifying payment systems is the way of organizing interaction between participants, where centralized and decentralized types of interaction are distinguished. In the decentralized type, payments are made by transferring funds to direct correspondent accounts opened by participants with each other. In this type of interaction, all participants perform the same functions and have equal rights and responsibilities. The centralized type is characterized by the intermediaries who process payments from other participants. The participants in such a system differ in their functions and are subject to a certain hierarchy (Pertceva, 2019). We use these criteria to further compare payment systems serving the real economy and cyber-economy systems based on blockchain technology. The history of blockchain dates back to the early 1990s when physicists Stuart Haber and W. Scott Stornett, trying to solve the serious problems of the safety, security and resistance to hacking digital data, published an article describing the use of a chain of cryptographically

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protected blocks to preserve the information integrity and its protection (Haber & Stornetta, 1991). In 1993, in response to the proliferation of spam and other Internet abuse, a proof-of-work concept was developed to counter these negative phenomena, and in 2008 an article titled Bitcoin: A Peer-to-Peer Electronic Cash System was published, which identified the key aspects of the most widely known Bitcoin blockchain (Nakamoto, 2008). Concerning blockchain technology, first of all, attention should be paid to decentralization. There are three main forms of decentralization: architectural , which determines the number of computers that form the system and the number of computers that can fail at any time; political , which determines the number of people or organizations that control the computers of the system; and logical , i.e. the interface and data structure that the system represents and maintains. Political and architectural decentralization allows blockchains to reduce the likelihood of failures, since they depend on many separate components and significantly reduce the negative consequences of cyberattacks by intruders since the networks are distributed over many computers, which makes the blockchain resistant to such attacks. The virtual form of banking operations performed in the modern world assumes that each banking operation is expressed in an instant change in the content of the central banking database, reduces the reliability and stability of credit institutions, as well as the banking system as a whole, since any new high-tech innovations increase and complicate banking risks (Sychev et al., 2017). In this regard, the construction of payment systems on the principle of peer-to-peer decentralized systems will increase the transactions’ reliability and the data storage security, since any accounting operation and changes in the balance of funds on the client’s account are recorded in a new block and cannot subsequently be changed. Cryptocurrencies were created for use in decentralized and publicly available payment systems, so their source code, as a rule, was open from the very beginning (Tabernakulov, 2019). Concerning credit institutions, the problems of distributing the digital ledger during payment transactions and access to payment data are solved through the use of a non-public or private blockchain, when the source code remains closed. In private blockchains, dedicated trusted nodes with a higher

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authority level compared to other users connect new users to the network and also disconnect them. Credit institutions started to use private controlled blockchains in 2016. The most famous enterprise solution based on common ledger technology is the R3 Corda project originally developed by J. P. Morgan Banking Group. and in 2016 transferred to the R3 CEV blockchain consortium of which J. P. Morgan became a key investor (Tabernakulov, 2019). Each node of private distributed ledgers has a pre-assigned access level and, unlike a public (open) blockchain, the data is not publicly available. Closed distributed ledgers are not decentralized in the strict sense of this definition, since the network is built on a hierarchical basis. Corporate blockchainsare managed using special nodes with increased “powers” and “responsible” for the data dissemination policy, identifying users, as well as certifying the data entering the blockchain. The use of blockchain technologies for making payments and settlements will change the elements of the traditional payment system since each operation will be considered final and this will not allow the use of mechanisms to optimize cash flows through calculating net participants’ positions, there will be no need for a clearing and settlement centre. Thus, the benefits of netting, which are reduced funding when making payments, will not be used in blockchain technologies. The Corda project is not the only example of enterprise blockchains. Developed under the auspices of the Linux Foundation, the Hyperledger project allows you to create custom blockchain platforms for business with almost any set of parameters from the public to fully controlled. An important problem and task of electronic banking are to ensure the customer data security in the changing nature of banking services and, in part, its content, as well as the composition of factors and sources of risks associated with banking activities, due to which credit institutions’ risk profiles shift and a fundamentally new phenomenon, which can be defined as the “information circuit of banking”, appears (Lyamin, 2011). The main factors contributing to the emergence of new sources of banking risk components include: first, the clients who interact with a credit institution remotely and are unable to promptly respond to fraudulent actions by intruders posing as bank employees;

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secondly, mobile operators, Internet providers that provide communication and communication services between the client and the bank, that is, a third party that is not related to the banking business and, thirdly, potential availability arising in open systems and universal protocols of network interaction of automated banking systems and other information and processing resources of credit institutions, as well as devices used by customers for remote banking services for unauthorized access and network attacks. Thus, electronic banking technologies, along with benefits for credit institutions and convenience for their clients, have significantly expanded the range of potential threats that can arise without accurately identifying and localizing their source (Lyamin, 2011). Of course, credit institutions are constantly developing ways to combat cybercriminals, and countering cyber-attacks has shown a positive result. Thus, for the first three quarters of 2019, Positive Technologies experts recorded 61 attacks on financial companies (for the same period in 2018, there were 69 of them, and for the whole 2018 there were 92 attacks). Phishing was used in 74% of attacks and malicious software was used in 80% of attacks. These are the main methods of penetrating the local network of financial institutions from the Internet. It can be assumed that the slight decline in the number of cyberattacks at financial institutions is associated with several factors. First, a significant decrease in the share of massive attacks on such financial and credit institutions has been observed. For example, in the third quarter of 2019, only 4% of recorded attacks were massive, and in the same period a year earlier, this figure was at 32%. This is explained by the fact that most banks, especially large ones, are currently able to effectively repel a massive attack (e.g. sending ransomware), and hackers have focused their attention on other, less secure industries, including digital ecosystems. Secondly, hackers are updating the arsenal of malware used and their infrastructure and switching to new regions, targeting the victims who are less prepared for such attacks. Studies of the Russian and foreign banking markets indicate that financial institutions widely use artificial intelligence technologies. First of all, we are talking about machine learning. Machine learning not only enhances end-user convenience when dealing with banking services but also successfully deals with fraud in the banking sector.

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According to the non-profit organization European Association for Secure Transactions (EAST),1 in the first six months of 2019, the main damage from cyberattacks on European banks’ self-service systems fell on attacks of payment terminals (124 million euros)—even though attacks on ATMs using malicious software (malware) and the black-box technology caused only minor financial damage, which did not exceed 1000 euros. The number of contactless payment scams is on the rise. This is mainly due to operations below CVM (Cardholder Verification Method) limits when the user does not have to enter a PIN to confirm transactions. 15 years ago, the number of financial service providers was limited by the card-issuing bank, the company providing acquiring services, and the payment system (Visa, MasterCard), but today, much more people have access to cards and information: Apple Pay and Samsung Pay, mPOS terminal manufacturers, mobile network operators, smartphone manufacturers, etc. Thus, the number of “payment witnesses” is increasing, they all have indirect access to the bank account and information of the cardholder, and therefore the risk of information leakage and fraudulent transactions increases. A similar situation has developed with online banking. (For details see Panova et al., 2020.) The EU countries have begun to implement the new PSD2 payment transactions directive, which is designed to create conditions for innovating the financial sector and providing additional customers’ protection. The directive implies that banks provide an open API to all third-party financial service providers (Open Banking) and requires to strengthen the payer’s authentication (Strong Customer Authentication). This requirement implies mandatory two-factor authentication, for example, the need to periodically check two of the three elements (PIN, fingerprint, face biometrics, etc.). Following this requirement, for example, after every five contactless transactions, the payer will be obliged to insert the card into the chip reader, and the mobile application will periodically ask for a PIN. However, these measures are aimed not only against external attackers but also to counter the so-called friendly fraud. Comprehensive implementation of such measures will improve 1

https://www.finextra.com/pressarticle/80191/atm-malware-and-logical-attacks-fall-in-europe.

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banking systems security, especially in such sensitive areas as contactless payment and card payments. An important feature of crypto-economics is that we can issue cryptocurrencies that are not tied to any jurisdiction, which complicates not only controlling the monetary sphere and the state’s monetary policy but also violates the integrity of the monetary space of the circulation zone of a particular official currency. Autonomous networks, smart contracts, smart assets and infrastructure will use new value exchange methods optimized around crypto platforms. For example, Sun Exchange, a startup on the African continent, not only allows you to buy solar panels for local villages using cryptocurrency but also generates so-called solar coins from each kilowatt produced. Artificial intelligence, blockchain and the need for smart contracts will create IP-optimized value exchange systems that bypass currency controls if needed. Modern principles of regulating the financial intermediaries’ work do not allow regulating organizations in which there are no bylaws, a management structure, a financial or general director who would take responsibility for the company’s financial management, but there is only code that follows the instructions. Even though the legal issue of crypto tokens is currently very complicated (e.g. the Telegram initiative with the Gramm cryptocurrency), it has not been legally resolved and does not fit into the logic of the monetary circulation laws. But today, the unsolved problem of cryptocurrencies circulation can make markets where offerings based on cryptocurrencies are illegal, much less competitive and attractive to startups. The main legal problem of companies dealing with artificial intelligence (decentralized autonomous organizations) is that they are constructed in virtual cyberspace, guided by instructions in the form of computer code. Regulators can adhere to traditional norms and inhibit the development of corporations based on artificial intelligence or smart contracts, or condition the programmers who write the code to adhere to the rules of securities law and regulations on investment business since regulators simply have no other experience. Regulating institutions that accept deposits or issue currency is the historical role of central banks. But in a world where cryptocurrencies

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can be issued by a group of programmers or a technology company such as Ant Financial, Microsoft (with Xbox loans) or Starbucks, which have attracted more deposits on behalf of their customers than a modern traditional bank, controls and structural elements just do not work. In this regard, an urgent question arises: What value the banking license itself will have soon since non-banking entities offer more and more services and compete with banks in their traditional field? Alipay, for example, has a payment license in China, but half of its users are outside of China. Will Alipay have to obtain a payment license in every country where it works? If we speak from the point of view of modern regulations, it has. The situation is similar to deposits or funds held in e-wallets. Does Ant Financial have to obtain a banking license in every country where its clients keep deposits? But the rules of different countries can contradict each other. Cryptocurrencies are clearly in conflict with the traditional forms and methods of regulating new financial markets and instruments. Even big companies like Facebook and Telegram face challenges. So, the American Securities and Exchange Commission (SEC) suspended the release of Gram—Telegram’s cryptocurrency, indicating that, in fact, it is an issue of securities hiding under the name of cryptocurrency. At the same time, the legislation requires issuers of securities to provide detailed information about their financial position, management, strategy, plans and risks (Kiniakina, 2019). Under these conditions, Telegram was forced to stop the placement, and investors were offered two options: postpone or return 77% of the invested funds. The head of the French Central Bank said that cryptocurrencies cannot be private. Thus, the Libra Face Book currency is issued in accordance with the stock of official state currencies. It was created by the Association, which includes large companies, like Visa and Mastercard. The Swiss Central Bank said in December 2019 that most central banks would not approve of using the Libra and would not accept the currency basket underlying the cryptocurrency. The heads of the EU Financial Departments also issued a joint statement in which they noted that the Libra cryptocurrency threatens the financial system’s stability.

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However, in most cases, financial regulators cannot influence the operations in cryptocurrencies themselves. They proceed from the assumption that these currencies are used to conduct transactions that have been barred from public money. And additional control is established where the transition from cryptocurrencies to real money is carried out. These places are crypto exchanges where you can buy or sell currencies. Until recently, compliance procedures were not required and exchanges were not required to identify customers, but now the situation is changing. At the same time, the crypto exchanges themselves can pose a threat of losing money for their clients. The example of one of the largest cryptocurrency exchanges in Canada, Quadria CX, shows the vulnerability of the existing closed-code order. In early 2019, Gerald Cotton, a 30-yearold CEO of Quadria CX unexpectedly died in India. At the same time, the company’s managers said that only he, the founder and head of the company, knew the passwords and keys from the wallets of tens of thousands of users, to whom the cryptocurrency exchange now cannot return the money. The cryptocurrency was stored in so-called cold wallets that did not have access to the internet. Exchange customers even doubted Cotton’s death, since two weeks before that happened, he bequeathed everything to his wife. The company Ernst & Young was hired. They found that instead of 160 million, which should have been stored in wallets, there were several hundred thousand left. Besides, it was reported that the reputation of Cotton and his business partners is also far from perfect. All this allows regulators to fairly point out that all the requirements for internal control and financial stability of financial institutions developed in recent years make sense from the point of view of investor protection. When issuing licenses, regulators monitor the internal control organization, managers’ reputation and experience. Sometimes it really helps to cut off fraudulent schemes at the very beginning. The increasing risk of money laundering is of particular concern to all regulators in connection with cryptocurrencies. For example, in its annual report on monitoring the risks to the country’s financial system, the Swiss Financial Markets Supervision Authority pointed out the increased risks associated with the new technologies and digital assets. New technologies have the potential to make the financial industry more effective, but

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their anonymity, speed and global nature make them attractive for illegal transactions. At the same time, companies that collect funds as technological ones and use blockchain technologies for collection purposes, in fact, may work legally, but some of them can be scammers.

Results Blockchain technology allows payments and settlements in real-time, as well as eliminates the risk of losing payment data during cyberattacks, which makes data more reliable and secure. However, blockchain technology also implies issuing a cryptocurrency, which can be used as a means of payment, which is not tied to a specific jurisdiction and affects the monetary space’s integrity within a state or a union of states.

Conclusions Cyberattacks on financial market infrastructure have no boundaries, the problem of cyber risks is international, and they can affect the entire financial ecosystem, cause financial shocks such as liquidity dislocation, credit losses and, ultimately, the financial instability of a market or a separate region or country. The European Central Bank has developed two key tools to improve the resilience of financial market infrastructure and counter cyber attacks: cyber resilience oversight expectations for financial market infrastructures (CROE) and the European framework for threat intelligence-based ethical red-teaming, TIBER-EU. But at the same time, the centralized architecture of building a traditional payment system remains dominant, and the risks of cyber-attacks and data loss remain. A critical change in the work of the regulator is leadership focused on technological or digital oversight, rather than policy and process regulation. The skill set required by the regulator is not related to policy

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development and expert compliance. It is almost entirely based on technological supervision and the ability to react and adjust the market in a very dynamic real-time mode. This evolution will take place, in our opinion, quickly, in a normative way in just 10–15 years.

References Cyber resilience oversight expectations for financial market infrastructures. https://www.ecb.europa.eu/paym/pdf/cons/cyberresilience/Cyber_res ilience_oversight_expectations_for_financial_market_infrastructures.pdf. Felix, M. (2014). Money: The Unauthorised Biography. From Coinage to Cryptocurrencies. Vintage Books. A Division of Random House LLC. Haber, S., & Stornetta, W. S. (1991). How to time-stamp a digital document. https://link.springer.com/content/pdf/10.1007/BF00196791.pdf. Kiniakina, E. (2019). “There is no TON ecosystem”: Why did the SEC stop Telegram ICO and what does this mean for the Durov project. Available at: https://www.forbes.ru/tehnologii/385351-nikakoy-ekosistemy-tonne-sushchestvuet-pochemu-sec-ostanovila-ico-telegram-i-chto. Accessed 13 November 2019. Krivoruchko, S. V. (2013). National payment system: Structure, technology, regulation. international experience and Russian practice. KNORUS. Lyamin, L. V. (2011). The use of electronic banking technologies: A risk-based approach. KNORUS. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. https://bit coin.org/bitcoin.pdf. Panova, G. S., & others. (2020). Banks and banking in the global economy. MGIMO-University. Pertceva, S. (2019). Payment systems in the digital economy. Moscow State Institute of International Relations, MGIMO. “Statistics on payment, clearing and settlement systems in the CPMI countries”. Committee on Payments and Market Infrastructures. Bank for International Settlements 2017. Available at: https://www.bis.org/cpmi/publ/ d172.pdf. Sychev, A. M., Revenkov, P. V., & Dudka, A. B. (2017). Security of electronic banking. Intellectual Literature.

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Tabernakulov, A. (2019). Blockchain in practice. Alpina Publisher. What is TIBER-EU? https://www.ecb.europa.eu/paym/cyber-resilience/tibereu/html/index.en.html.

Role of National Currencies in Transforming International Monetary System Vladimir Shapovalov

Introduction For many years some countries have been actively discussing plans to expand the use of thier national currencies in foreign trade contracts. With the US dollar dominating the international monetary system, global trade and investments depend on economic entities’ access to dollar liquidity and respective financial infrastructure. The current model of international monetary system does not guarantee uninterapted international transactions of economic entities thus endangering their economic relations with foreign partners. Increase of the share of national currencies in international transactions will remove possible barriers that might arise for foreign

V. Shapovalov (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_8

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economic entities. This issue is becoming more relevant as some countries already cannot use the US dollar and the corresponding payment channels. In this paper, we consider alternatives to the US dollar for foreign economic relations on the example of the common European currency and the Chinese yuan.

Methodology As per SWIFT in order for a currency to be considered international, it has to be used: – in foreign trade financing, – foreign investments, – as a reserve currency. The IMF (according to article XXX, paragraph f of the International Monetary Fund Agreement) defines a freely used currency in the world as follows: – it is widely used for payments in international transactions, – it is being actively traded in the main foreign exchange markets. The European Central Bank regularly monitors the international use of the euro as per the following criteria: – the share of the euro in the international reserves of foreign central banks, – the volume of international debt obligations denominated in euros, – use of the euro as the currency of international contracts outside the EU, – physical delivery of euro banknotes outside the EU.

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Results The Place of the Euro in the International Monetary System For 20 years the Euro remains the second most important currency in the international monetary system. According to statistics from the IMF, SWIFT and the Bank for international settlements: – the Euro accounts for 21% of international central bank reserves; – 23% of international bonds, 19% of bank loans and 24% of deposits are denominated in euros; – 36% of international contracts are being conducted in euros; – transactions with euro account for 38% of all conversion operations. Thus, euro is being widely used internationally as a store of value, medium of exchange and means of payment. The following highlights characterise the use of the euro as an international currency. 1. The share of the Euro in international central bank reserves. As per ECB the share of the euro in the reserves of central banks remains stable at the level of 21% while US dollar share is descrasing (to 61%). In 2018, the Bank of Russia sold more than 100 billion dollars making Euro the leading currency in its reserves. The People’s Bank of China also cut its dollar investments in the same year by about $ 60 billion. 2. International investments in euro instruments. The attractiveness of financial instruments denominated in euros is declining. This trend reflects forecasts for moderate economic growth in the Eurozone, as well as global investors’ risk preferences resulting from COVID-19 pandemic, trade conflicts global political instability.

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According to the ECB, international investment in debt instruments denominated in euros in 2018 decreased by 190 billion, while net purchases of European companies’ shares by foreign investors in February 2019 amounted to only 60 billion euros, compared with 490 billion euros in December 2017. 3. The Euro exchange rate. The Euro depreciated by 11% against the US dollar from January 2018 to January 2020. At the same time, the Euro depreciated slightly against the currencies of the EU’s main trading partners over the same period. The decline was due to strong domestic demand in the US and weak forecasts for economic growth in the Eurozone. As for the currencies of the EU trading partners, the decline was not significant, due to the relative weakness of the exchange rates. 4. The share of the Euro in foreign exchange transactions. According to the CLS system, the Euro is being constantly ranked second after the US dollar in terms of the conversion transactions’ volume. 5. The share of bonds denominated in euros. In 2018, 22.8% of international debt obligations were issued in euros. Issuers from emerging markets began to show interest for bonds in euros to diversify their currency risks. As a result, from 2015 to 2018 the share in euro bonds of issuers from developing countries reached 9% (increasing from 7%), while the share of dollar bonds decreased from 89 to 84%. 6. The share of the Euro in international lending and deposit operations. In 2018, the share of international loans and deposits in euros reached 19.3%, which is almost 1% more compared to 2017.

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The Euro has taken a more important role in international lending and deposit operations as a result of the ECB’s policy. 7. The share of the Euro as the currency of international contracts. The share of the Euro in international contracts has been stable for about 10 years. In 2018, 62% of export and 51% of import contracts with non-EU counterparties were concluded in euros. 8. The demand for euro banknotes. In 2018, there was a stable foreign demand for euro banknotes. Euro banknotes were purchased mainly by countries neighbouring the EU, Great Britain, Switzerland and, in particular, Russia. Euro cash was also supplied from EU-neighbouring countries, as well as Eastern Europe and Turkey.

Chinese Yuan Internationalization Over the past 10 years, the Chinese yuan has gone through all three phases of currency internationalization according to the SWIFT criteria. The Chinese currency is currently being used in trade finance, foreign direct and portfolio investment, and as a reserve currency. According to SWIFT, the Yuan was ranked 8th among the most widely used world currencies in 2013, and it was 5th in December 2020. According to the People’s Bank of China, the yuan’s share in total Chinese settlements with foreign counterparties increased by 17% in 2018 compared to 2017, amounting to $761 billion in absolute terms. According to the IMF, Central banks in 60 countries included the yuan in their international reserves in 2018, and the total share of global assets in yuan increased to 1.8% of the total value of reserves, which is equivalent to $192.54 billion. As for the IMF criteria of the freely used currency—Chinese currency is not actively traded in the main financial markets, despite the existence of direct currency pairs with the main Chinese trading partners (Table 1).

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Table 1 Trading volume on the foreign exchange market of the Moscow Exchange, RUB billion bln, RUR

2013

2014

2015

2016

2017

2018

2019

2020

Currency market

156 016

228 546

310 837

329 954

347 671

348 369

308 274

328 946

SPOT

57 297

77 798

103 335

107 169

78 380

86 682

67 370

96 942

USD/RUR

49 327

67 267

92 383

95 530

68 299

72 829

52 210

80 705

EURO/RUR

6 446

8 954

9 159

10 058

8 502

12 227

13 119

13 408

CNH/RUR

20

252

697

285

122

173

221

318

other

79

14

20

72

50

83

102

265

SWAP

98 720

150 748

207 502

222 785

269 291

261 686

240 904

232 003

USD/RUR

77 899

121 555

165 600

182 804

217 663

204 922

190 418

185 911

EURO/RUR

19 644

25 758

34 241

33 007

39 728

47 016

38 452

36 663

CNH/RUR

16

53

161

491

370

908

330

668

other

-

-

4

37

67

126

74

128

Source Moscow Exchange

In terms of the share of the yuan in international settlements it is still inferior to the Canadian dollar, Japanese yen, British pound sterling, euro and US dollar. In December 2020, according to SWIFT, the Chinese currency accounted for 1.2% of the total volume of international payments if we exclude payments within the Eurozone (Fig. 1). In terms of the yuan’s exchange rate stability, a significant difference in the exchange rate and its dynamics were observed at various stages of its internationalization. From May 2020 to May 2021 the exchange rate moved from 7 yuanper dollar to 6.5.

Trends in the Use of Other Currencies According to the Bank for International Settlements, the positions of the 7 major currencies following the US dollar have remained stable since 2016. At the same time, in April 2019, the aggregate share of emerging market currencies increased. The shares of the British pound sterling, Australian dollar, Canadian dollar and Swiss franc did not change.

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Fig. 1 Share of currencies in international payments (excluding payments within the EU). Source SWIFT RMB Tracker https://www.swift.com/swift-resource/ 250136/download

The main changes took place in the currencies of developing countries. The share of foreign exchange transactions with the Korean won (growth from 17th to 15th place), Indian rupee (from 18th to 16th place), Indonesian rupee (from 31st to 25th place) grew, while the positions of the Mexican peso (from 11th to 15th place) and the Turkish lira (from 16th to 19th place) deteriorated while the Russian rouble held 17th place with a share of 1.1% in the total volume of conversion operations. 5 international financial centres—London, New York, Singapore, Hong Kong and Tokyo accounted for about 80% of transactions, half of which were conducted in London.

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Conclusions/Recommendations Today, the US dollar continues to dominate the international monetary system. It is the main instrument of international trade and foreign exchange transactions. Dollar-based financial instruments are being used in major international financial centres and by resource rich countries. The efforts of countries aimed at promoting their national currencies change the global picture but at an extremely slow pace. Only the European currency is a competitor to the US dollar today. The European Union continues stimulating economic growth, maintaining the stability of the financial sector and thus confidence in the European currency. Despite the Chinese economic growth and the government policy aimed to promote the national currency abroad, the yuan makes a relatively modest part of the total international settlements. To increase the yuan’s internationalization, China needs to continue economic reforms and stimulate the financial markets. Countries that want to offer their economic entities more choice when conducting international operations and decrease their dependance from the existing global financial infrastructure need to stimulate reduction of transaction costs and foreign exchange risks in international settlements.

References Borio, C. (2019, April 4). Strengthening the international role of the euro: European and international perspectives. Brussels. Boz, E., Gopinath, G., & Plagborg-Moller, M. (2017). Global trade and the dollar (IMF Working Paper, No 17/239). Casas, C., Diez, F., Gopinath, G., & Gourinchas, P.-O. (2017). Dominant currency paradigm: A new model for small open economies (IMF Working Paper, No 17/264).

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Coeuré, B. (2019, February 15). The Euro’s global role in a changing world: A monetary policy perspective. Speech at the Council on Foreign Relations, New York City. Eichengreen, B. (2017). The Renminbi goes global. Foreign Affairs, 96 (2), 157–163. Eichengreen, B., Mehl, A., & Chitu, L. (2017). How global currencies work— Past, present, and future. Princeton University Press. Georgiadis, G., & Mösle, S. (2019). Introducing dominant-currency pricing in the ECB’s global macroeconomic model (Working Paper Series, ECB, Frankfurt am Main). Georgiadis, G., & Schumann, B. (2019). Dominant-currency pricing and the global spillovers from US shocks (Working Paper Series, ECB). Gopinath, G., & Stein, J. (2018a, April). Banking, trade, and the making of a dominant currency (NBER Working Paper, No 24485). Gopinath, G., & Stein, J. (2018b, May). Trade invoicing, bank funding, and central bank reserve holdings. AEA Papers and Proceedings, 108. Landry, D. G., & Tang, H. (2017, September 16). Rise of the redback: Internationalizing the Chinese Renminbi. The Diplomat. https://thediplomat.com/ 2017/09/rise-of-the-redback-internationalizing-the-chinese-renminbi/. Manuel, A. The staggering impact of China’s ‘Belt and Road’ Initiative—The Atlantic. https://www.theatlantic.com/international/archive/2017/10/chinabelt-androad/542667/. Accessed March 26, 2018. McCauley, R., & Ito, H. (2018, December). A key currency view of global imbalances (BIS Working Paper, No 762). Narkevich, S. (2012). Reserve currencies: Emergence factors and role in the world economy. Gaidar Institute. Plubell, A. M., & Liu, S. A snapshot of Renminbi internationalization trends under one belt one road initiative. EMPEA Regulatory Affairs. https:// www.empea.org/app/uploads/2017/10/Snapshot-of-Renminbi-Internationa lization-Trends-Under-One-Belt-One-Road-Initiative.pdf. Prasad, E. (2017). Gaining currency: The rise of the Renminbi. Oxford University Press. RMB Internationalisation: Can the Belt and Road Revitalise the RMB? SWIFT, July 28, 2017, https://www.swift.com/news-events/press-releases/ rmb-internationalisation_can-the-belt-and-road-revitalise-the-rmb.

Monetary Policy: Global Trends and the Development of Bank of Russia’s Approaches Veronika Zagoyti

Introduction The worsening epidemiological situation, coupled with the reintroduction of restrictive measures in several countries, undermines economic growth across the globe. According to the International Monetary Fund’s (IMF) autumn forecasts, the global economy is expected to slow down by 4.4% in 2020 due to the negative effects of the COVID-19 pandemic. In particular, the USA will face a drop of 4.3%, the Euro area of 8.3% and Russia of 4.1%. The unprecedented uncertainty of the recovery path is also compounded by several political factors (i.e. US elections, Brexit). Meanwhile, most economies are experiencing a low level of inflation driven by a weak aggregate demand with the consumer price inflation decreasing further. Thus, in advanced economies, inflation is currently below pre-pandemic levels, while in emerging market and developing V. Zagoyti (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_9

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economies it declined sharply at the early stage of the pandemic with recovery partially in line with the prices for energy commodities. Against this background, almost all financial regulators in the world rapidly eased their monetary policies and have expanded operations to stimulate economic activity during the lockdowns. Significantly, the majority of central banks have been lowering their policy since late 2019, the last time such a simultaneous reduction was observed being during the global financial crisis of 2008. For example, the reduction of key rates took place in Australia (by just 75 bps to 0.75% in 2019), Brazil (by just 200 bps to 4.5% in 2019), India (by just 135 bps to 5.15% in 2019), Indonesia (by just 100 bps to 5% in 2019), Mexico (by just 100 bps to 7.25%) and South Korea (by just 50 bps to 1.25% in 2019). Over the last year, the key rate in Turkey was gradually reduced by half to 12% in mid-December, while on January 17, 2020, the Central Bank of the Republic of Turkey announced a reduction of 75 bps, so it fell to 11.25%. Furthermore, most countries including those listed above use inflation targeting as their monetary policy regime. Its history goes back 30 years, to when it was first officially applied in New Zealand in 1990. Notably, no country has abandoned the regime. Finally, it is necessary to highlight the global trend of the liberalization of currency regimes. According to the IMF Annual report on exchange arrangements and exchange restrictions 2018, since April 2017, the number of countries using soft currency fixing regime increased significantly. Currently their share is just under half (46.4%) of all member countries. The second major category includes those countries with flexible regimes: the floating rate is applied in 35 countries, and the free-floating rate is applied in 31 countries, including Russia. These global trends cannot but have an impact on the Russian economy and its key partners in the Eurasian region which are also pursing inflation targets.

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Methodology The idea of inflation targeting as a monetary policy regime was actively supported by academic economists and financial regulators in the 1990s after the failure of the exchange rate targeting regime as a nominal anchor. Among the positive effects of inflation targeting, it is necessary to note a decrease not only in the level of key rates and inflation but also in its volatility, as well as an increase in the rate of economic growth (Neumann & von Hagen, 2002). Besides, some economists highlight a reduction in inflation expectations and an improvement in the quality of inflation forecasts (Corbo et al., 2001; Mishkin & SchmidtHebbel, 2001). At the same time, the benefits of inflation targeting remain unconfirmed (Ball & Sheridan, 2003), in particular, because of its relative youth. Another important element of monetary policy that requires attention is the exchange rate regime. Economists have been discussing its impact on exchange rate volatility since the last century. According to some studies (Canales-Kriljenko & Habermeier, 2004), the greatest volatility is achieved with a floating exchange rate. Thus, under the sliding corridor regime, countries were able to reduce the volatility of the nominal effective exchange rate below the level corresponding to their economic development. In other flexible regimes, this result was not achieved, but the volatility remained lower. This paper examines the use of inflation targeting and floating exchange rates in Russia and other member countries of the Eurasian Economic Union (EEU) with such scientific methods as analysis, synthesis, analogy and a structural approach.

Results The monetary policy of the Bank of Russia has undergone significant changes in the period of 2014–2019. First of all, the transition to the inflation targeting regime was implemented at the end of 2014. In this regard, the refinancing system has been optimized: the main indicator of monetary policy was the key rate (its value was 5.5% at the time of the

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announcement at the end of 2013, while in January 2020 it was 6.25%). The previously effective refinancing rate became reference only and had been adjusted to the key rate level by 2016. Besides, since February 2014, the Bank of Russia has suspended all permanent operations for more than one day. REPO auctions have become the main tools for regulating the banking sector’s liquidity (with a period of one week, and with a period of one to six days, they have been used as a fine-tuning tool). Auctions for providing loans secured by non-market assets at a floating interest rate for a period of three months, as well as auctions for providing the loans secured by non-market assets or guarantees at a floating interest rate for a period of up to 12 months, served as an additional mechanism. Secondly, the exchange rate regime changed in 2014: from managed to floating, which allowed the Bank of Russia to focus on achieving the inflation target. Currency swap transactions for buying and selling US dollars, as well as REPO operations in foreign currency, remain the main channel of the Bank of Russia’s influence on the foreign exchange market. As noted above, the IMF defined the Russian ruble regime as freefloating in 2019, which confirms the success of the chosen path. Thirdly, the Bank of Russia’s communication policy has been expanded: the dates of Board meetings for the upcoming year have been published on the official website, as have analytical materials, including the annual “Main directions of the unified DCP”, a quarterly report on monetary policy issued following the results of reference meetings of the Board of Directors, interviews with the Bank of Russia’s management, and various statistics. Besides, meetings with financial market participants (investors and analysts) have been held to explain the current policy of the Bank of Russia. This helps to increase the level of confidence in the central bank, reduce the level of uncertainty about its future actions, form stable inflation expectations, and effectively operate the transmission mechanism of monetary policy in general. The successful transformation of the Bank of Russia’s monetary policy has increased the overall level of financial stability, which has affected the country’s economic position within the most important integration association for Russia within the post-Soviet space, the EEU.

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The EEU treaty, signed between Russia, Kazakhstan and Belarus in 2014, provides for a coordinated macroeconomic and monetary policy. At the moment, all member states have switched (or are switching) to the inflation targeting regime, and the inflation targets are in the range from 2.5 to 7%. At the same time, the spread of the key rates varies from 4.25 to 9.25%. Historical data (see Fig. 1) indicates a continued trend towards the convergence of the policy rate curves. The inflation range is also narrowing gradually (see Fig. 2). According to the data as of December 2019, the lowest inflation level was registered in Armenia (0.9%), and the highest one was in Kazakhstan (5.4%). In Belarus, it was 4.7%, while in Kyrgyzstan and Russia it was 3.1%. At the same time, there are still certain differences in the monetary policies conducted by the central banks of the EEU countries. For instance, the Central Bank of the Republic of Armenia switched to the inflation targeting regime in 2006, setting an inflation rate of 4% with a range of ±1.5% of acceptable fluctuations as an interim target, and a short-term interest rate as an operating target. It also has absolute independence in choosing the monetary policy strategy and its intermediate and operational goals.

Fig. 1 Policy rates in the EAEU countries (Source Refinitiv)

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Fig. 2 CPI, % year on year, standardized, not SA (Source Refinitiv)

Its system of monetary policy instruments includes open market operations (main refinancing operations, short-term regulation tools, structural regulation tools), permanent instruments (pawn REPO operations and deposit operations, used at the initiative of counterparties), and the refinancing rate. Meanwhile, rates for permanent instruments indicate the limits of the market interest rate’s allowable deviations from the target value (the refinancing rate). Today, the upper limit is represented by the Lombard REPO rate (5.75%), and the lower limit is represented by the deposit rate (2.75%). Since February 2017, the key rate of the Central Bank of the Republic of Armenia has remained at the level of 6%, only since 2019 seeing a reduction against the background of low inflation. Moreover, the regulator conducts a sufficient communication policy: the main documents include the central bank’s three-year strategy, a quarterly review of inflation and press releases on the decisions taken. The National Bank of the Republic of Belarus (NBRB) announced the transition to inflation targeting regime in October 2019 (since 2015, monetary targeting had been used). The main goal of the monetary policy is to reduce inflation to 5% by the end of 2020. NBRB uses the refinancing rate as a basic tool for regulating the level of interest rates in

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the money market. Liquidity is provided to the banking sector through REPO transactions, swap transactions, and loans on an auction basis. Besides, swap transactions and loans are used as permanent instruments. Notably, due to another decline in the exchange rate of the Belorussian rouble against foreign currencies, the currency regime was changed from fixed to managed floating in 2015. In terms of communication policy, the National Bank of the Republic of Belarus publishes its annual “Main directions of monetary policy”, a quarterly report on inflation, inflation expectations, a monthly review of inflation, and press releases on the results of the decisions taken by the Board of Directors. The National Bank of Kazakhstan (NBK) has switched, since 2015, to the floating exchange rate of tenge and IT mode. As a result, the tenge exchange rate has almost halved against the US dollar (from 187 to 367) and has exerted strong pro-inflationary pressure: inflation, which was in the range of 4.8–7.8% from 2009 to 2014, reached double-digit values (the maximum is 17.7%) and remained at this level for about a year. To contain inflation, NBK raised the base rate from 5.5 to 12% in September 2015, to 16% in October 2015 and 17% in February 2016. The increase in the rate contributed to a slowdown in the overall price level. Furthermore, the following intermediate goals were set: ● 5–7% at the end of 2018, ● 4–6% at the end of 2019, ● lower, but close to 4% at the end of 2020 and beyond. The main instrument of monetary policy of the NBK is the base interest rate, set with a corridor of ±1 percentage points, and the shortterm one-day interest rate of the money market (TONIA1 ) acts as the operational target. To set the level of interbank interest rates near the base rate, as well as to limit the volatility of short-term money market interest rates, NBK conducts the operations aimed at providing or withdrawing

1

TONIA (Tenge OverNight Index Average) is a weighted average interest rate on REPO opening transactions on the Kazakhstan stock exchange for one business day.

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liquidity in the money market (open market operations, permanent access operations). Since 2016, NBK has gradually reduced the key rate from 17 to 9% (in June 2018). Due to the 2% drop in the tenge exchange rate due to the possible restrictive measures against Russia (Kazakhstan’s main trading partner), NBK conducted currency interventions in the amount of US$ 0.5 billion. As a result, in October 2018, the base rate was raised by 25 bps to 9.25% (from April to September 2019, it was 9%). NBK defines the current key rate as close to neutral. Following meetings, NBK issues press releases and also regularly publishes quarterly inflation reports, monthly economy overview and annual main focal points of the monetary policy. The National Bank of the Kyrgyz Republic (NBKR) announced a gradual transition to inflation targeting regime in the medium term in 2017. Since 1992, the NBKR has been regulating the volume of monetary aggregates, ensuring a relatively stable exchange rate of the national currency at their expense having switched to the interest rate targeting regime in 2014. The system of monetary policy instruments includes operations in the open market (auctions for NBKR notes, operations on the secondary securities market, REPO operations, credit auctions); permanent operations (intraday credit, overnight credit, seven-day credit, overnight deposit); operations on the foreign exchange market (currency interventions, currency swap operations of the NBKR); a key (discount) rate; and mandatory reserve requirements. In addition to the above, an operational benchmark (short-term money market rates) is used. The lower limit of the corridor is determined by the overnight deposit rate, while the upper limit is determined by the overnight loan rate. Since 2015, the NBKR has gradually reducing the official discount rate, going from 10 to 5.0% per annum. It also applies the floating exchange rate regime with the currency interventions carried out to mitigate sharp fluctuations in the exchange rate. Thus, in 2018 NBKR conducted 11 interventions, buying 20 ml USD and selling 154 ml USD. The communication policy of the National Bank of the Kyrgyz Republic should end up producing a joint statement of the government

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of Kyrgyzstan and the NBKR on the main focal points of the economic policy for the corresponding year, as well as a number of documents: the main focal points of the monetary policy for the medium-term period, a quarterly report on monetary policy, and press releases on the decisions taken.

Recommendations Currently all EEU countries are heading for a single monetary policy regime—inflation targeting—while being at different stages of the path and preserving some national characteristics. Meanwhile, the range of key rates in the member countries and that of the inflation level is narrowing. In general, creating a single monetary policy for EEU member states seems feasible in the long term. However, these countries need to go through several preparatory stages. Firstly, this requires introducing a single medium-term target for inflation. At the same time, effective interest rate channels would help to set inflation expectations and real interest rates at the same level across all the EEU countries. The second stage requires implementing a unified exchange rate policy. The analysis revealed some differences between the actual exchange rate regimes of the EAEU member states. Nevertheless, the steps taken to ensure a flexible exchange rate contribute to the harmonization of approaches to creating a single currency policy. Higher confidence in the national currencies of the EEU member states enables the use of such currencies more frequently in mutual settlements under trade contracts with the lower shares of the US dollar or the euro. Finally, it is necessary to coordinate monetary policies implemented by the EEU countries at the supranational level with the elaboration of a single monetary policy strategy in the long run. We believe it is appropriate to use the positive European experience (in particular, that of establishing the European Central Bank) and to make the supranational body of the EEU fulfil this function, as envisaged by the concept of creating a common financial market by 2025.

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All things considered, a common monetary policy for EEU countries should help normalize the inflation rate, reduce the exchange rate volatility, distribute capital effectively, increase competition and increase foreign and mutual trade; thereby, this should promote macroeconomic stability, both in member states and in the region as a whole. Though the COVID-19 pandemic has had a significant impact on these economies, it might be an opportune moment to strengthen cooperation and walk together on the path of recovery with similar monetary policy tools.

References Ball, L., & Sheridan, N. (2003, January). Does inflation targeting matter? Paper for the National Bureau of Economic Research conference on Inflation Targeting, Bal Harbor, Florida. Bank of Russia. (2019). Monetary Policy Review. Available at https:// www.cbr.ru/Collection/Collection/File/25679/2019_04_ddcp.pdf. Accessed 30 January 2020. Canales-Kriljenko, J., & Habermeier, K. (2004). Structural factors affecting exchange rate volatility: A cross-section study (IMF Working Paper, WP/04/147). Available at https://www.imf.org/~/media/Websites/IMF/imp orted-full-text-pdf/external/pubs/ft/wp/2004/_wp04147.ashx. Accessed 30 January 2020. Corbo, V., Landerretche, O., & Schmidt-Hebbel, K. (2001). Assessing inflation targeting after a decade of world experience. International Journal of Finance and Economics, 6 (348), 168. International Monetary Fund. (2019). Annual report on exchange arrangements and exchange restrictions 2018. IMF. Available at https://www.imf.org/~/ media/Files/Publications/AREAER/areaer-2018-overview.ashx. Accessed 31 January 2020. Mishkin, F. S., & Schmidt-Hebbel, K. (2001, July). One decade of inflation targeting in the world: What do we know and what do we need to know? (Working Paper No. w8397), National Bureau of Economic Research, Cambridge, MA. Neumann, M. J. M., & von Hagen, J. (2002). Does inflation targeting matter? Federal Reserve Bank of St Louis Review, 84 (4), 127–148.

Financial Innovations, Financial Engineering and Financial Technologies: Risks or New Opportunities? Innovations and New Financial Technologies in the Practice of Banking Aleksei Bolonin, Igor Turuev, and Vladimir Balykin

Introduction Until recently, FinTech primarily developed in such fields as payments, money transfer, P2P lending and crowdfunding. Solutions for complex office operations in the form of FinTech innovations (robotisation, BigData) have been offered. The implementation of achievements in the field of AI systems is underway. Beginning in the mid-2000s, CIs have been investing a significant portion of their budgets in the funding of innovations and the development of new financial instruments. The combination of innovative start-ups and major technology players has shaped the evolution of a global FinTech industry. The utilisation of A. Bolonin (B) · I. Turuev · V. Balykin Moscow State Institute of International Relations (MGIMO University), Moscow, Russia I. Turuev e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_10

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technology innovations helps actors expand their market shares in many fields of financial services in the retail segment of the market.

Methodology Over 12,000 start-ups in the field of financial innovations are currently active worldwide. Innovations in customer service. By analysing a consolidated list of customer requirements with respect to banks, we have established the existence of a stable demand for certain services and products including the obtaining of loans, the opening of deposits, online account management, money transfer, etc. New technologies enable the creation of banking services integrated with the contemporary world (Skinner, 2014). The development of digital ecosystems (“DEs”) capable of satisfying the entire range of customers’ vital needs, including non-financial ones, will be the next stage in the evolution of credit institutions. It is vital for banks to retain their customers within their respective DEs by offering risk assessments with respect to their transactions. Remote banking service (RBS) and the problem of customer involvement. Convenience and cheapness are the key benefits that the new services offer to their customers; despite financial innovations contributing to a significant increase in the number of financial service users, non-banking institutions are also growing rapidly by offering account management services to their customers for the purpose of purchasing goods within trading systems. For instance, money flowing into the Chinese WeChat or Alipay remains beyond the control or use of credit institutions. Over 40% of the population currently use the bKash system and make payments from their mobile devices. Almost 100% of the economically active population in Kenya regularly use M-Pesa for their mobile payments, thus saving up to 20% on bank changes. Between 2011 and 2015, the number of financial service users doubled due to the deployment of RBS and new Aadhaar identification services. In 2018, Paytm, a mobile wallet service, boasted 280 million users and planned to hit the 0.5 billion level within the 3 subsequent years. The involvement of companies who utilise the omnichannel infrastructure of debit cards in

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order to process money debit/credit transfers for transaction parties— Alipay, SoftBank (Japan), banking innovations by Uber, Alibaba and Amazon—are a powerful infrastructure-related factor. The bank account going virtual pushes down the share of conventional payment tools (for instance, the use of cheques in the United States has decreased by 70% since 2000) and expands the opportunities for making banking transactions independently. Customer needs and product analytics. During the 1960s and 1970s, the first ATMs automated basic teller operations with respect to cash delivery. In 1995, Wells Fargo launched a web site which showed a client their account balance. As a further step, statements of customer accounts were moved online. Transfers among accounts were later also enabled. By launching their iPhone with NFC support, Apple brought about a revolutionary upheaval in banking innovations in the form of mobile payments. The demand for advice in any place and at any time has provided the momentum to develop a service for communications with chatbots. Product range standardisation easily makes communication between a human being and a machine more formal. In most cases, people ask the same questions when approaching a bank. The banks have seen voice control and chatbots as another channel for promoting their conventional products. A human-centred design facilitates the development of banking products with due regard for consumer needs and provides additional profits for CIs. Chatbots collect and process information on customer needs and generate a product based on emotional banking, whose principal advantage is the ability to obtain more precise information on any customer from various sources (the Internet, mail, payment systems, geo-location, etc.); through this process, the personalised features of the product itself can be determined objectively, it can be offered at the right time, and it can be linked it to a broad context associated with the customer’s smartphone. This brought into existence the concept of virtual financial advisor that largely pre-determined the potential for the expansion of RBS functionality. In December 2015, almost 40% of the US residents had not visited any branches of their banks for 6 months—the fact that demonstrated the new trend for the formation of a cluster of banks without

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physical networks (neo-banks). The structure and contents of KPIs for CI network staff have been modified by introducing more indicators reflecting sales via the Internet, where the branding platform will be moved and an environment for evaluating customer needs will be set up. Within a period of 3–5 years, as one could reasonably expect, most branches of retail banks will migrate into the omnichannel online dimension (Moven and Monzo) and the experience of managing customer relations enriched by FinTech will create additional components in the capital base of a bank. In July 2017, the Korean Internet platform Kakao, the owner of its own messenger and the Kakao Taxi service, launched its digital Kakao Bank. For the first 5 days of the bank’s operations alone, more than one million accounts were opened, the aggregate account balance reaching $0.5 billion. According to data from May 2019, the highest number of settlement accounts has been opened by NUbank (Brazil), in operation since 2013, with 12 million users; the Korean Kakaobank, in operation since 2016, has 10 million accounts, and Chime, a digital bank headquartered in San Francisco, has 6.5 million. The FinTech start-up Revolut is next with 6 million customers. These companies have no branches, but they have convenient applications, and almost each of them positions itself as a free-of-charge alternative to bank charges. At the same time, these FinTech companies either co-operate with conventional banks or obtain a banking licence themselves. For example, Revolut has obtained a licence from the European Central Bank as a Lithuanian Bank. The Chinese bank ICBC, in an attempt to compete with Alibaba and Taobao, launched its own e-commerce service, Rong E-Gou. In 2015, ICBC offered its platform to businessmen who sold goods and services worth almost $218 billion. In 2018, Sberbank, jointly with Yandex, established a very similar platform called Beru in Russia as a further example of developing a new ecosystem-based environment. Lending and financial market transactions. Some inconsistency regarding credit risk assessment between conventional banking regulation and the new technologies. Lenders use new types of data and machine learning tools in order to fine-tune the risk assessment models that were developed when computer capacities were weak or did not exist at all. Credit risk assessment produces different results for different

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groups of borrowers, differences which are often disadvantageous to small and medium-size businesses characterised by low revenues and high market volatility. Approved models are typically based on the use of credit points and therefore show positive results for those consumers whose scores are high in terms of the chosen model; however, such models may inadvertently exclude people without a credit history or with complicated credit histories, which are hard to assess effectively using available data (such as past financial failures due to health problems). Such a model may exclude those customers who are creditworthy and could prove that in case the lender had more objective information about them. Technologies based on a customer’s metadata review make the evaluation of his or her creditworthiness much more unbiased. Now banks can learn much more about people besides their credit histories and accounts, which is also important in order to reveal fraud and money laundering situations. The use of scoring models has allowed an increase in the quantity and quality of loans. The customer provides replies to questions, and, if the situation is standard, decisions will be made without human involvement. The collection of all available information on the customer’s behaviour and financial discipline has become part of technology development. Among the practical results of this activity is the generation of customer-specific offers where the bank offers pre-approved loans under individual terms and cross sales; these practices not only raise the bank’s revenues but can also be viewed as a tool to enhance customer loyalty. The use of robots for the purpose of dealing in financial markets is one of the ways to enhance the efficiency of banking operations. Theoretically, a robo-advisor should assist a new investor in putting together a portfolio in accordance with the customer’s risk profile that the robot should correctly determine. In this regard, credit institutions and the regulator should monitor the emerging new risks, such as potential market manipulation associated with simultaneous movement of funds and papers upon the formation of identical portfolios and the abuse of customer trust. Robotised software—replacing human actions and capable of working 24/7 without errors—can be used to carry out standard operations. For the purposes of operational and bookkeeping activities, AI produces a

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significant improvement in terms of quality, speed and risk abatement. Automated liquidity management systems analysing and predicting cash requirements have begun to appear. Many opportunities are currently impeded by data quality. As data storage and processing methods improve, the processes could become cheaper and safer. Financial and regulatory reporting. In November 2017, the UK Financial Conduct Authority (FCA) held an experiment involving the preparation of a regulatory protocol based on the use of flexible digital models. Having assembled an aggregate code for all financial market players, they coded an amendment to the statutory reporting mandate, applied it to a set of fictional data, and successfully prepared a new procedure reflecting the revised “machine-to-machine” rule. The reporting update—that could take several months or even years to complete if conventional tools were used—was made in approximately 10 seconds. Highly automated regulation will not, of course, be used in any and every areas, but, wherever possible, it will enable time and money saving both for governments and for businesses and individuals. Changes in missions, culture, skills and protocols. The majority of regulatory authorities working today would require the redefining of missions, coverage and protocols. First of all, this means the need to rethink the problems of cryptocurrency regulation and the very nature of banking business in an open banking environment. In this regard, it would be advisable to declare new principles of regulation: the principles of platform flexibility and openness. The regulators are required to speed up their cycles for the creation and updating of rules. Some of them might be structured so that to operate as an open-platform service similar to GitHub or App Store, which would prescribe standards and then enable the implementation of the innovations subject to compliance with regulatory requirements. The regulatory authorities might also publish certain rules in the form of a software code so that it could be input into industry systems and automatically ensure consistent conformity. One important area of digitalisation and banking innovation is addressing the problem of customer identification. Facebook, Apple, Tencent, Amazon, Alibaba/Alipay, Uber, Snapchat and other worldwide platforms are currently the largest holders of extensive identification data

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sets; they not only possess basic identification data, but also maintain complex sets of behaviour-related data, as well as biometric data, such as facial recognition. It is quite likely that, in the near future, most banks will outsource customer identification to identity brokers, such as Facebook or the Aadhaar card system. In the future, it will be of no benefit to banks to act as identification data holders; they will interact with identification services and simply make available enough information to correctly certify the identity of any new customer, since softwarebased face recognition technologies identify customers more precisely that face-to-face interaction with a bank employee. In the immediate future, the prevention of money laundering and terrorist financing will not be based on a reporting mechanism requiring banks to act as a virtual police in order to trace suspicious transactions or suspicious account holders. Instead of that, information systems will be tracing transactions en masse, searching for suspicious flows and identifying activity centres requiring police response, as now occurs within the SWIFT system. Cyber security. Cyber security compliance is a separate aspect of the matters under discussion. This is required to detect any attack and the attacker in the system as soon as possible and to reduce the attacker’s capabilities so as to rule out any irreparable damage to the system (the so-called ability to detect). In this regard, there is demand for highly intelligent protection tools enabling timely detection of any attacks or incidents. For the first three-quarters of 2019, Positive Technologies’ experts recorded 61 attacks on financial companies (compared to 60 for the corresponding period in 2018 and 92 for 2018 as a whole). 74% of those attacks used phishing and 80% used malware. These are the key methods for penetrating the local networks of financial entities from the Internet. New regulatory requirements for cryptocurrencies. Regulating cryptocurrencies is undoubtedly complicated by the decentralised nature of most cryptocurrencies, the lack of any clear internal supervision, and seeming anonymity. Some countries have issued rules making cryptocurrencies technically illegal, whilst others have introduced major restrictions and licensing on crypto exchanges. The evolution of autonomous networks, smart contracts, intellectual assets and infrastructure will likely

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include the creation of new value exchange methods optimised around crypto platforms. Financial innovations certainly include new formats of venture investment funds operating as decentralised autonomous organisations. A decentralised autonomous organisation (“DAO”) is a venture investment fund based on a computer code and using the Ethereum blockchain infrastructure. Doing without any typical structure of corporate governance, the fund uses Ethereum cryptocurrency as the basic architecture for its assets. Technically, a DAO is based on an automated smart contract among the community members involved in the experiment and represents a template for future business transactions, which will become a typical phenomenon in 10–15 years. Currently, however, the regulators would prohibit such types of organisations in most jurisdictions worldwide, since a DAO lacks a management board, charter or business licence, and there are no officers who could be fully responsible for any decisions being implemented within the operational structure of the DAO. In addition, a contemporary financial system is not ready to embrace such companies, since there is no technical solution available with respect to the taxing of economic agents that can be classified neither as legal entities nor as individuals. Such investment funds operating in a virtual space and using cryptocurrencies as their units of account are distinguished by the fact that the units of account themselves are issued without being linked to any jurisdiction, so that the enforcement of any specific state’s laws and regulations is ruled out. No solution has been found yet with respect to the regulation of capital movement into funds incorporated in one country, operating in another country, accepting investments from investors in cryptocurrencies worldwide and capable of relocating their crypto coins into a different jurisdiction without any operational consequences, a fact which is a challenge to regulators on a global scale. Nevertheless, the process of cryptocurrency conversion into fiat money that constitutes legal tender in a particular jurisdiction having its own courts and tax legislation partly contributes to solving the problem of capital movement regulation. Those regulators, which will promptly find a solution addressing the regulation of new financial technologies and choose not to impose

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administrative restrictions upon potential innovations at the market level, will promote investment in the emerging FinTech ecosystem and contribute to the migration of capital into their respective markets. The regulation of institutions accepting deposits or issuing currency has played a historical role of central banks, but control and structural elements have begun to crumble in a world where cryptocurrencies can be issued by a team of programmers or a technology company. In this regard, one could appropriately ask whether the banking licence itself will still be valuable in the immediate future, since nonbank entities offer ever more services, thus competing with banks in their traditional field. Financial technologies imply progress not only with respect to new formats of customer care and service, but also in terms of fraud. The evolution of cryptocurrencies and their active deployment in the financial world clearly contradicts the conventional forms and methods for the regulation of new financial markets and instruments (Kiniakina, 2019). In most cases, regulators cannot influence cryptocurrency transactions themselves. They rely on the fact that these currencies are used to perform transactions banned in the field of official money and impose more controls on crypto exchanges, where cryptocurrencies are converted into real money. All requirements for the internal controls and stability of financial institutions that have been developed over recent years make sense from the standpoint of investor protection. When issuing licences, regulators monitor internal control arrangements and the reputation and experience of managers. Sometimes it actually helps them eliminate fraud-related schemes from the very outset. In connection with cryptocurrencies, all regulators are especially concerned with the growing risk of money laundering. The new technologies are potentially capable of increasing the efficiency of the financial industry, but their anonymity, speed and global coverage make them attractive for use in illegal transactions. In this regard, entities that collect funds as technology companies are actually different in nature and can simply be fraudsters. Antoine Gara notes that bank securities are traded on exchanges at a price significantly lower than shares in many technology companies. That

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is why many FinTech start-ups seek to position themselves as technology rather than financial firms (Gara, 2019).

Results Listed below are banking products that may significantly change in the immediate future: the credit card and overdraft will transform into a smart solution with a dynamic credit limit on the basis of predicting algorithms; cheques, the settlement account and the debit card will transform into a cloud-based personal money storage linked to a multicurrency mobile wallet; the savings account will be supplemented with tools and tips encouraging saving behaviour; consumer credits will be associated with advice as to payment options when making purchases; mortgages will be reshaped in order to act as a home purchase assistant; auto loans/leases will give way to subscriptions for access to autonomous vehicles; the bank account for small businesses will be replaced with a smart solution for the holding of funds (including bookkeeping, tax calculation and payments using AI-based technologies); the credit facility for business needs will be supplemented with predictive analytics and tools to ensure even distribution of cash flows; the fixedterm deposit, savings certificate, investment account or interest-bearing savings account will become a robotic assistant for capital accumulation. Flexibility and the absence of regulation are the key advantages of FinTech start-ups, but their disadvantage is the lack of reliable information on their status, their ability to generate revenues and even the availability of the technologies promised to investors. Automation has penetrated all areas related to the provision of standard products to such an extent that it is replacing practically all human personnel.

Conclusions Credit institutions have entered a virtual cyberspace, and this opens up new opportunities, creates new factors of risks and modifies the profile

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of these risks. The expanded information space of credit institutions requires, in its turn, a shift of a regulator’s supervisory functions towards the new information perimeter of banking business. IT and AI capabilities transform the financial space from a real into a virtual one. If, therefore, regulators seek to promote capital flows and investments in business activities, then the closing of investment funds using cryptocurrencies would hamper free capital movement and restrict a number of innovative start-ups, thus increasing risks for such funds’ customers, whose number is rising worldwide. The regulator should implement the intense, AI-based monitoring of business behaviour and market models of transactions using RegTech or a supervision technology called SuperTech or SupTech. A reform in banking supervision should create systems based on digital infrastructure, since no improvement of old analogue processes would become an appropriate response to the challenges of the digital era. To this end, it is necessary to determine the data and analysis required to achieve the goal and then to digitalise the regulatory framework in order to make its functionality better and its operation cheaper.

References Arner, D., Barberis, J., & Buckley, R. (2017). FinTech and RegTech in a Nutshell, and the future in a Sandbox. Available at: https://www.cfains titute.org/en/research/foundation/2017/fintech-and-regtech-in-a-nutshelland-the-future-in-a-sandbox?s_cid=ppc_RF_Google_Search_FinTechandRe gTech. Bank of Russia. (2018). The main directions of development of financial technologies for the period 2018–2020. Available at: https://cbr.ru/Content/Doc ument/File/84852/ON_FinTex_2017.pdf. BIS. (2017). Statistics on payment, clearing and settlement systems in the CPMI countries. Committee on Payments and Market Infrastructures. Bank for International Settlements 2017 . Available at: https://www.bis.org/cpmi/ publ/d172.pdf.

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Deloitte. (2020). RegTech Universe 2020. Take a closer look at who is orbiting in the RegTech space. Available at: https://www2.deloitte.com/lu/en/pages/ technology/articles/regtech-companies-compliance.html. Digital Commerce 360. (2016). China 500 Report (2016). Available at: https:// www.digitalcommerce360.com/product/china-500-report/. Finextra. (2019). ATM malware and logical attacks fall in Europe. Available at: https://www.finextra.com/pressarticle/80191/atm-malware-and-log ical-attacks-fall-in-europe. Gara, A. (2019). The Forbes investigation: Inside the secret bank behind the Fintech Boom. Available at: https://www.forbes.com/sites/antoinegara/2019/ 12/17/the-forbes-investigation-inside-the-secret-bank-behind-the-fintechboom/#352fcdbc3c10. Accessed 17 December 2019. iResearch. (2016). China’s third-party mobile payment market shot up 69.7% in 2015 iResearch. Available at: http://www.iresearchchina.com/content/det ails7_21238.html. Kakao. (2018). Kakao ecosystem. Available at: https://t1.kakaocdn.net/kakaoc orp/operating/ir/results-announcement/3246.pdf. King, B. (2020). Bank 4.0: Banking everywhere, never at a bank. Wiley. Kiniakina, E. (2019). There is no TON ecosystem: Why did the SEC stop Telegram ICO and what does this mean for the Durov project? Available at: https://www.forbes.ru/tehnologii/385351-nikakoy-ekosistemy-tonne-sushchestvuet-pochemu-sec-ostanovila-ico-telegram-i-chto. Accessed 13 November 2019. KPMG. (2019). KPMG the pulse of Fintech 2019 Biannual global analysis of investment in fintech. Available at: https://home.kpmg/xx/en/home/campai gns/2019/07/pulse-of-fintech-h1-2019.html. Martin, J. A. (2016). 7 reasons mobile payments still aren’t mainstream. CIO Magazine. Available at https://www.cio.com/article/3080045/7-reasons-mob ile-payments-still-arent-mainstream.html. Accessed 7 June 2016. PwC. (2015). Disrupting cash, accelerating electronic payments in India. Available at: https://www.pwc.in/assets/pdfs/publications/2015/disrupting-cash-accele rating-electronic-payments-in-india.pdf. Qian, Z. (2014). Analysis of business model innovation in “Rong e Gou” of industrial and commercial Bank of China. Available at: https://core.ac.uk/display/ 41431661. Regtech. (n.d.). Solutions for regulatory reporting, risk & asset liability management and tax reporting. Available at: https://www.reg.tech/en/our-solutions/ banks-other-financial-institutions/.

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Skinner, C. (2014), Digital bank: Strategies to launch or become a digital bank. Marshall Cavendish Business. Wintermeyer, L., Bedford, D., & Gulamhuseinwala, I. (2016). Capital Markets: Innovation and the FinTech landscape How collaboration with FinTech can transform investment banking. Available at: https://www.ey.com/ Publication/vwLUAssets/EY-capital-markets-innovation-and-the-finTechlandscape/$FILE/EY-capital-markets-innovation-and-the-fintech-landscape. pdf.

Banks and Banking: New Trends and Challenges Marco Ricceri, Valentina Tarkovska, and Irina Yarygina

Introduction Despite the initial efforts—this is the clear complaint contained in the Introduction of the UN Report—the world is not on track for achieving most of the 169 targets that comprise the Goals. The limited success in progress towards the Goals raises strong concerns and sounds the alarm M. Ricceri Rome, Italy e-mail: [email protected] V. Tarkovska Dublin, Ireland e-mail: [email protected] I. Yarygina (B) Moscow State Institute of International Relations (MGIMO University), Financial University Under the Government of the Russian Federation, Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_11

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for the international community. Much more needs to happen—and quickly—to bring about the transformative changes that are required. An important role in this respect plays multilateral banking institutions that contribute to the global economy by introducing profound standards of financial activity and new instruments for meeting the needs of their clients. Considering the fast paste of the technological development and the role technology plays in improvement of business efficiency and productivity, there is a need for open discussion of the changes technology brings to every day operations and to the processes inside the boardroom. Boards have to be, at least, aware of the forthcoming technological destructions and to be able to navigate their companies in the right direction, that guarantees sustainable performance and satisfy interests of different groups of stakeholders including shareholders and society at large. It is especially important for banks and financial institutions. Banks serve interest of much broader pool of stakeholders and, in comparison with other companies, the role of corporate governance in financial institutions is to balance their [stakeholders’] interests and to provide protection to parties. This requires a much deeper involvement of the board of directors in strategic issues and risk oversight. In the era when technology is growing exponentially and leaders and boards are only changing incrementally (Bonchek, 2016), incorporation of smart technologies to support decision-making process at the board level becomes inevitable. Pairing smart people with smart technologies and augmenting board intelligence using artificial intelligence (AI) can improve board performance and benefit banks and financial services companies in the long run. AI can result in reduction of agency and monitoring costs (Fenwick & Vermeulen, 2018) of financial institutions, and it is not far-fetched anymore as we have, for example, Einstein and Vital, who are “seating” on boards and are consulted for advice with their voices being considered for the final decisions.

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New Challenges for the Multilateral Development Banks In a specific passage—with reference to the dual objective of promoting a decisive transition towards new economic systems, truly sustainable and just, and in parallel to organize a different governance system, by goals and inclusive—the UN Report explicitly recognizes the role of the development finance institutions, including public development banks, operating at the multilateral, national and regional levels, a role that is defined as “significant” (GSDR, 2019, p. 34). There is a clear awareness that the organization of a new development model presents enormous financing needs and that a targeted increase in public spending by states, however important, will never be sufficient to achieve the objectives of the 2030 Agenda. In this situation, the choices of private investors are decisive. It is therefore necessary to promote a common effort by public and private sector operators: “all public development banks – national, regional and multilateral – as well as business and private finance sectors, should put the onus on investors to take account of sustainability when making investment decisions or engaging with investees on their portfolios. Through regulatory and behavioral changes, market practices should better reflect the need to orient financial flows towards sustainable development and adopt sustainability standards” (GSDR, 2019, p. 136). To this end, states are urged to define regulatory systems suitable for promoting effective public-private partnerships, “designed to ensure that risk is allocated fairly and that the public interest is not subsumed into private or corporate interests”; furthermore to “encourage private sector investments in public goods. If it is to invest more in human well-being, the private sector will require greater incentives. Those can come in the form of government regulations and taxation that direct profits towards the necessary public goods”. “However – the Report specifies - it should also be noted that prioritizing human well-being could generate enormous business opportunities for welfare investments” (GSDR, 2019, p. 45). To understand the value of these recommendations it is useful to remember that the United Nations had approved the guidelines and concrete actions to be promoted in this area in a previous document,

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“The Addis Ababa Action Agenda”, that was adopted at the Third International Conference on Financing for Development (Addis Ababa, Ethiopia, 13–16 July 2015) and subsequently endorsed by the UN General Assembly in its resolution 69/313 of 27 July 2015. We are, therefore, about two months before the General Assembly which on September 25 of same year approved the 2030 Agenda. The Action Agenda establishes a strong foundation to support the implementation of the 2030 Agenda for Sustainable Development. It provides a new global framework for financing sustainable development by aligning all financing flows and policies with economic, social and environmental priorities. It includes a comprehensive set of policy actions, with over hundred concrete measures that draw upon all sources of finance, technology, innovation, trade, debt and data, in order to support achievement of the Sustainable Development Goals. It is important to stress the point, that multilateral development banks can provide countercyclical lending, including on concessional terms as appropriate, to complement national resources for financial and economic shocks, natural disasters and pandemics, as well as contribute to providing both concessional and non-concessional stable, long-term development finance by leveraging contributions and capital, and by mobilizing resources from capital markets (Action Agenda, point 70, p. 33). It is worth, while mentioning the growing role of Development banks in global environment that reveals an important tendency in global finance, alleviating constraints on quality infrastructure investment, sub-sovereign loans and encourage develop new instruments to channel the resources of long-term investors towards sustainable development, including through long-term infrastructure, green bonds, new financing mechanisms to support economic development (Action Agenda, point 75, p. 35). Modern economy is characterized by technological progress, that plays an important role in banking and forms the basis for a key trend, related to the introduction of Artificial intelligence in practice.

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Artificial Intelligence in the Modern Banking The financial sector always has been one of the frontrunners of IT technologies. IT contributes to stronger profitability by improving operational efficiency. This is true not only for back and middle office but also for the front-end of a bank. IT solutions have been focusing on the automating repetitive tasks that would otherwise require human involvement. For example, the automated teller machines (ATMs) replaced the repetitive tasks of bank cashiers (Kaya, 2019). They made it easier for clients to access the banking service while also making banks more efficient. Online banking is another example of client-facing IT adopted by banks. With banks and their clients meeting on virtual platforms, banking is becoming less and less branch dependent. Nowadays, AI is something to consider regardless of whether a bank wants to improve or personalise customer service or optimise processes. AI can bring exceptional value and lower cost to a business and its customer, and it does so. AI will have a huge impact on financial services sector. It will redefine banking processes, products and services, and user experience. AI allows banks to become analytics-driven and use the data to dynamically inform and share what they do in real time. Banks, which fail to keep pace with technology, will not be able to compete and might lose their customers (Jubraj et al., 2018). AI in banking is implemented in the real-time identification, and prevention of fraud in online banking, know-your-customer (KYC) process, and also use of robo-advisors. There are three broad roles of AI in banking: assisted AI, advisory AI and autonomous AI (Thomas et al., 2016). In the banking context, there are several specific autonomous AI applications, which include autonomous robotic trading and handling of loan applications, and becoming more and more commonplace.

AI and Banking Governance Corporate governance is important for the proper functioning of the banking sector and the economy as a whole (BIS, 2015). The revised corporate governance principles for banks emphasise the importance of

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keeping abreast of development in banking for board members (BIS, 2015). The board of directors is the main governing body in any modern corporation including financial services firms. The main boards’ functions are outlined by the G20/OECD Principles of Corporate governance (OECD, 2015). Directors’ main duties include but not limited to advice, monitoring and supervision. Boards also retain certain managerial duties and are responsible for the appointing and terminating senior management and approving major transactions. On top of this, boards also have to fulfil service and relational functions and provide advice to management and, in particular, to CEO, and to act as a liaison with company stakeholders. Artificial intelligence in the board room is not far-fetched anymore. Einstein and Vital are just two examples of AI “board members”, who are consulted for the advice with their voices being considered for the final board decisions. Cost of bad decisions is very high and this is one of the main factors that accelerates the use of AI in the boardroom. Business has become too complex and, in many cases, it is difficult for boards and CEOs to make good decisions without assistance of intelligent systems. Boardroom decisions are often made with the emphasis on gut feelings. Only 16% of board members fully understood the trends in their industries and the changes that technologies can make to these trends. Libert et al. (2017) advises on the necessity of development of a usable “corporate genome” to allow for AI integration into the decisionmaking process at the board level. With AI assistance, board decisions can be based on the analysis of corporate patterns and industry trends. Data-driven decisions, such as capital allocation, earnings distribution, risk management, to name a few, will be improved with the supplement of AI. Thus, AI doesn’t merely replace board members but augments already intelligent guidance. Artificial intelligence for both operating and strategic decisions can become an essential competitive advantage (Libert et al., 2017). At the same time Kolbjørnsrud et al. (2016) report that managers across all hierarchical levels spend half of their time on administrative and control tasks, and remaining 50% of time is spent on so-called judgement work, including problem solving and collaboration, strategy and innovation, and relations with different groups of stakeholders. In contrast, board members spend approximately 75% of their

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time on judgement work with the rest being spent on the administrative work (McKinsey‚ 2018a). Academics and practitioners alike agree that AI can be used for the almost all administrative duties but disagree when it comes to the judgment work. On the one side, Kolbjørnsrud et al. (2016) suggests that human managers will dominate the judgment work and advise that in the context of judgement work, the role of AI will remain advisory. And in this kind of support with the judgement tasks, AI will realise its greatest potential for value creation. Human judgement cannot be replaced by AI, as it may result in short-termism and jeopardy of the long-term profitable strategies, which cannot be easily identified from data. Thus, board members have to be able and willing to combine their experience and insight with data analytics to balance short-term and long-term goals. Hence, the role of managers as ultimate decision-makers is unquestionable when it comes to judgment tasks. Agrawal et al. (2017) question the ability of AI to initiate the reliable actions even though AI excels in forecasting. Agrawal et al. (2017) and Beck and Libert (2017) suggest that organisations will have demand for people who can make responsible decisions (requiring ethical judgement), engage customers and employers (requiring emotional intelligence) and identify new opportunities (requiring creativity). They also suggest that human judgement will be required when deciding on how to apply AI in the best possible way. Beck and Libert (2017) also suggest that AI should not replace directors or automate the leadership on the board room but can be used for the board intelligence augmentation. AI can be used when assistance and advice is needed by board members rather than as a replacement, for the board. Frey and Osborne (2017) hypothesise that “generalist” work might be difficult to replace by machine because this work requires high degree of social intelligence for the tasks associated with negotiations, coordination and problem resolution. Frey and Osborne (2017) predict that over the next decade or two management, business and finance occupations, which require a high degree of the generalist skills, face very low risk of automation. On the other side, we have strong proponents who believe that AI will replace the management in the nearest future. Bostrom (2016), Susskind and Susskind (2015) among others advocate the possibility that machines will assume leadership positions. Bostrom (2016) argues that

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machines can excel in strategizing, social manipulation and economic activity, which are the important skills for management and, if replicated by machine, will allow creating of an artificial director or manager. Predicts that machines can be better than humans when it comes to the judgement work due to the emergence and improvement of emotionally intelligent AI. Kaku (2018) even speculates that by the end of century there will be machines with innovative learning capabilities and self-aware robots. Thus, if technology will progress exponentially, we can witness the unprecedented “technological unemployment” with machines mastering even judgement tasks. And, in accordance with this view, managerial tasks, which rely on data and results of the analysis, might be easily automatable (Petrin, 2019). Assuming the scenario that board tasks can be fulfilled by the advanced AI, we might expect the boards to be smaller and/or also boards with the AI director/software, which might combine all benefits of diverse group of board member with a broad variety of knowledge, expertise, ethnical and cultural backgrounds. Technologies are even well-placed to facilitate more “inclusive” models of organizations that empower more stakeholders; they can help to increase engagement and responsibility of all stakeholders in a company (Fenwick & Vermeulen, 2018). And this is what will change the traditional corporate governance. In the new model when cryptoroute is used to raise money, tokens can provide the right incentives to all stakeholders. In this model, traditional roles such as investors, executives, managers and consumers will become blurred, and information asymmetries—one of the main issue that corporate governance has to deal with—will become much less significant (Fenwick & Vermeulen, 2018). Decentralized forms of organization can use AI to improve company’s communication process. This allows for continuing reporting instead of annual report. AI will make accountability stronger and reduce the temptation to act opportunistically (Fenwick & Vermeulen, 2018). All these technologies characterized by a fast pace of development, multitude of application, huge uncertainties about risks, advantages and future directions create enormous challenges for regulators. Regulators can find themselves in a situation when they have to regulate blindly without sufficient facts or opt for doing nothing (Fenwick & Vermeulen, 2018). Regulators need much more flexibility than before; they have to

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move from traditional fact-based model and have to adopt a polycentric approach when companies, experts, regulators and public is involved, as they do in financial services, for example (Zetzsche et al., 2017).

Conclusions Modern banking is based on the mechanism that regulates the relationship between the banks, especially the multilateral ones and their customers in all phases of the project, from conception to implementation and monitoring of the results achieved, is based on continuous collaboration between the parties involved, where necessary, it provides for a continuous adjustment of the initiatives to be promoted with the help of both parties and with the involvement of third parties who are directly or indirectly interested in the project. There is no doubt that such a participatory mechanism must be further defined and specified to play a proactive role with the customer in identifying the most suitable standards to be respected on the occasion of the projects and technologies. Three core areas that AI will affect are people, processes and data. Financial institutions have to compete in the AI-dominated world, which places enormous pressure on their old hierarchical structures and corporate governance. By implementing AI technologies, banks can reduce costs and improve labour productivity, fight weak profitability and to remain competitive. Artificial intelligence for both operating decision-making and strategic decision-making will become an essential competitive advantage. Boards of directors are going to see more AI in corporate governance as board members next to them if they want to compete in data-driven decision-making. If regulators and other policymakers will not act and respond to a change, the more competitive jurisdiction will gain a competitive advantage in attracting the best new business and the most creative talent.

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References Agrawal, A., Gans, J., & Goldfarb, A. (2017). What to expect from artificial intelligence. MITSloan Management Review. http://ilp.mit.edu/media/ news_articles/smr/2017/58311.pdf. Accessed 25 January 2020. Beck, M., & Libert, B. (2017). The rise of AI makes emotional intelligence more important. Harvard Business Review Online. https://hbr.org/2017/02/ the-rise-of-ai-makes-emotional-intelligence-more-important. Accessed 25 January 2020. BIS. (2015). Corporate governance principles for banks. https://www.bis.org/ bcbs/publ/d328.htm. Bonchek, M. (2016). How to create an exponential mindset. Harvard Business Review. https://hbr.org/2016/07/how-to-create-an-exponential-mindset. Accessed 25 February 2020. Bostrom, N. (2016). Superintelligence: Paths, dangers, strategies. Oxford University Press. Fenwick, M., & Vermeulen, E. (2018). Technology and corporate governance: Blockchain, Crypto, and Artificial intelligence (Lex Research Topics in Corporate Law & Economics Working Paper No. 2018-7; European Corporate Governance Institute (ECGI) - Law Working Paper No. 424/2018). Available at SSRN: https://ssrn.com/abstract=3263222 or http://dx.doi.org/10. 2139/ssrn.3263222. Frey, C., & Osborne, M. (2017). The future of employment: How susceptible are jobs to computerisation? Technological Forecasting and Social Change, 114, 254–280. Janis, I. L. (1972). Victims of groupthink: A psychological study of foreign-policy decisions and fiascoes. Houghton Mifflin. Jubraj, R., Graham, T., & Ryan, E. (2018). Redefine banking with artificial intelligence. Accenture. https://www.accenture.com/_acnmedia/pdf-68/ accenture-redefine-banking.pdf. Accessed on 25 January 2020. Kaku, M. (2018). The future of humanity: Terraforming Mars, interstellar travel, immortality, and our destinit beyond Earth. Anchor Books. Kaya, O. (2019). Artificial intelligence in banking. EU Monitor Global financial markets. Deutsche Bank Research. https://www.dbresearch.com/PROD/ RPS_EN-PROD/PROD0000000000495172/Artificial_intelligence_in_ban king%3A_A_lever_for_pr.pdf. Accessed on 20 February 2020.

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Kolbjørnsrud, V., Amico, R., & Thomas, R. (2016). The promise of artificial intelligence: Redefining management in the workforce of the future. Accenture Institute for High Performance. Libert, B., Beck, M., & Bonchek, M. (2017). AI in the Boardroom: The next realm of corporate governance. MITSloan Management Review. https://sloanreview.mit.edu/article/ai-in-the-boardroom-thenext-realm-of-corporate-governance/. Accessed 2 February 2020. McKinsey & Company. (2018a). AI adoption advances, but foundational barriers remain. https://www.mckinsey.com/featured-insights/artificial-intell igence/ai-adoption-advances-but-foundational-barriers-remain#. McKinsey & Company. (2018b). The board perspective: A collection of McKinsey Insights focusing on boards of directors, number 2. https://www.mckinsey.com/ featured-insights/leadership/the-board-perspective. OECD (2015). G20/OECD principles of corporate governance. Petrin, M. (2019). Corporate management in the age of AI. Columbia Business Law Review, Forthcoming (UCL Working Paper Series [No.3/2019]). Faculty of Laws University College London Law Research Paper No. 3/2019. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3346722##. Susskind, R., & Susskind, D. (2015). The future of the professions: how technology will transform the work of human experts. Oxford University Press. Thomas, R., Fuchs, R., & Silverstone, Y. (2016). A machine in the C-suite. Accenture strategy. https://www.accenture.com/t00010101t000000z__ w__/br-pt/_acnmedia/pdf-13/accenture-strategy-wotf-machine-csuite.pdf. Accessed 25 February 2020. UN: The future is Now: Science for achieving sustainable development, Report on Global Sustainable Development (GSDR, 2019), presented at the High Level Political Forum (HLPF), NY, September 11, 2019. Zetzsche, D., Buckley, R., Barberis, J., & Arner, D. (2017). Regulating a revolution: From regulatory sandboxes to smart regulation. Fordham Journal of Corporate and Financial Law, 23(1), 31–103.

Transnational and Regional Banks Elena K. Volkova

Introduction Transnational banks (TNB), formed on the basis of the largest banks of industrialized countries, play a critical role in the national and international financial markets. These are universal credit and financial institutions with a wide network of branches, representative offices, departments and subsidiaries. The main TNB’s clients are transnational corporations (TNCs), international organizations, foreign representations, government institutions and large enterprises from various sectors of the economy. The level of capital concentration and capitalization of transnational banks is becoming a defining indicator of financial globalization. With E. K. Volkova (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia Belarusian State University, Minsk, Republic of Belarus © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_12

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TNBs, financial relations between economic entities are not limited to the boundaries of the nation states and are formed as an inter-state and cross-country. TNB’s accumulated capital allows lending to the largest projects on an international scale. Financial globalization manifested in the twentieth and twenty-first centuries through the strengthening of all countries’ mutual economic dependence, the developing foreign trade, fundamental changes in the means of transportation and communication, the developing international transport, the Internet and the creation of an extensive legal framework for servicing foreign economic and international financial relations, contributed to expanding international financial relations, increasing volume of transactions in financial markets, as well as cross-country cash flows, digitalizing financial services and significantly strengthening TNB’s positions. Considering that TNB’s main clients are TNCs, the largest of which are high-tech companies, it is becoming obvious that we need to introduce the latest financial technologies in the activities of largest banks. International financial relations are also influenced by internal changes in the financial sphere itself. The share of financial services in international trade is increasing, international loans, securitization of bank assets have become widespread, new types of financial services and instruments appear along with the development of remote banking. Despite the obvious positive result of achieving a high concentration of capital for TNBs, the largest banks have to deal with a constraining environment of low and negative interest rates, increased competition, especially that of fintech companies, increased risks of economic crises and global recessions, significantly slowing global economy’s growth rates, trade wars between major economic powers, increased regulation of banking, increased international requirements for the level and quality of equity capital, bank liquidity indicators and improved corporate governance. Regional banks are defined as credit institutions operating in one region of the country. The activities of regional banks complement the activities of the largest and large banks in the regions. The latter work either in several regions or throughout the country (if we take the Russian

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Federation they include PJSC Sberbank and other systemically important banks). In modern conditions, regional banks are being tested for strength and compete with the regional divisions of the largest banks, taking into account, on the one hand, the state support of the latter and the inevitable capital consolidation and concentration, and, on the other hand, the impact of the banking sector digitalization.

Methodology The research uses such scientific methods as analysis and synthesis, comparison, grouping of statistical and historical data, methods of expert assessments in information processing.

Results The Concept of Transnational Banks’ Functioning and Development Preconditions for Transnational Bank Formation and Functioning in the Context of Globalization TNBs are fundamental, key elements of economic regulation in the global financial economy; they play the role of a basic link in the banking system acting as leaders in banking on a global scale and have the following characteristics: – they are highly capitalized high-tech financial and credit institutions in international markets; they carry out a wider range of international transactions compared to national and regional banks, provide a full range of traditional and innovative banking products everywhere (on a global scale); – TNB head structures are often leaders with many years of experience in the national markets of foreign banking services, which indicates a solid and reliable base for the entire holding;

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– they carry out banking operations in the interests of the founders and the country of the capital’s origin forming a network of dependent foreign organizations in various regions of the world. This phenomenon often raises concerns on the part of national credit institutions, in order to protect which local regulators (central banks) restrict the penetrating foreign capital. TNBs are subdivided into global and regional , depending on the coverage of the places of activity. Global TNBs penetrate a significant part of the regions of the world economy. The development strategy of regional TNB is aimed at a specific region. For example, small Western European banks are expanding their activities on a regional scale, while their geography is often limited to Central and Eastern Europe. Regional TNBs can also include large CIS banks, which are expanding their activities in neighbouring post-Soviet countries in accordance with a strategy aimed at developing outside the national economy and overcoming the growth restrictions within the country. Regional TNBs are, as a rule, the leaders of the banking sector in the countries where the parent company is based. First TNBs date back to the seventeenth century, when the objective prerequisites for a change in the position of banks and banking in Europe were formed. Thanks to the world commodity market that appeared during the great geographical discoveries of the fifteenth and sixteenth centuries, strengthening national interests and economic claims of individual European states, a qualitative increase in the economic opportunities, internationalized financial ties and aggravated riskiness of entrepreneurial activity, banking could not help joining the general globalization of world economic relations (Lavrushin, 1999). TNBs were formed alongside the developing transnational corporations (TNCs), increasing production volumes, labour productivity and large-scale innovations in production and services. The work of TNCs is closely related to the foreign exchange and credit sectors of the global financial market. One of the fundamental methods of creating TNC is the merger of large corporations from different countries, while the internationalized production provides an incentive for international finance and TNBs.

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According to the Global Top 100 rating, published annually by the auditing company PriceWaterhouseCoopers (PWC), the total capitalization of the 100 largest TNCs in the world exceeded $25 trillion in 2019. The leading positions in the ranking are occupied by American TNCs. They account for more than half of the positions in this rating and 63% of the global corporate market capitalization. It should be emphasized that the technology sector is dominant in 2019. The top 10 largest TNCs by market capitalization by December of 2019 include companies such as Microsoft (technology sector, USA, $905 billion), Apple (technology sector, USA, $896 billion), Amazon (consumer services, USA, $875 billion), Alphabet (technology sector, USA, $817 billion), Berkshire Hathaway (financial sector, USA, $494 billion), Facebook (technology sector, USA, $476 billion), Alibaba (consumer services, China, $472 billion), Tencent (technology sector, China, $438 billion), Johnson&Johnson (health & biotechnology sector, USA, $372 billion), ExxonMobil (oil and gas sector, USA, $342 billion). The largest Russian TNC in 2019 was PJSC Gazprom with a market capitalization about of $56 billion. In 2020 technology sector continues to dominate. In the top 10 largest TNCs by market capitalization includes five above-mentioned technology companies, two consumer service companies (Amazon and Alibaba), one financial company (Berkshire Hathaway), one healthcare corporation (Johnson & Johnson), and one oil & gas company (Saudi Aramco). In 2020, Saudi Aramco took first place in the top 10 due to its historical IPO in December 2019 (market capitalization—$1.6 trillion). Taking into account TNCs’ activities, the organizational infrastructure of the global financial economy has developed with the world’s leading financial centres in New York, Tokyo, Hong Kong, Frankfurt am Main, London, Paris and other megacities, the subjects of which, in addition to TNCs, are official international and regional financial organizations operating under the United Nations Organization (International Monetary Fund and World Bank Group), Parisian, London, Rome and Tokyo clubs of creditors, TNB, institutional international investors, stock and currency exchanges, organizationally formalized as national and international financial markets (Slepov & Zvonova, 2007).

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Since the second half of the twentieth century, there has been an especially acute competition between TNBs, as a result of which the composition of the largest TNBs and their positions in the ratings of the largest banks in the world are continually changing. The US TNBs topped the list of the largest banks in the world for a long time (until the mid-1980s), then the Japanese TNBs took the leading positions (until the Asian banking crisis of the late 1990s). Further trends towards concentration, mergers and acquisitions affected banks in Europe, US and Japan, while the positions of European banks significantly strengthened. As a result of the competition, the balance of power in the world banking system has changed. Four Chinese banks occupied the first places of the 2019 rating, and this is quite natural, given the high rates of economic growth and productivity in China. The toughening regulatory requirements for banks’ performance on an international scale, and the increasing importance of banks’ reliability during economic crises, made ranking TNBs by the Tier 1 capital indicator (Tier 1 capital a key measure of a bank’s financial stability from the point of view of regulators) presented by The Banker (Table 1). All TNBs represented in the rating are included by the International Financial Stability Board in the list of global systemically important banks (G-SIBs) formed using the assessment methodology developed by the Basel Committee on Banking Supervision (BCBS). Table 1

Top 10 World Banks 2019

Rank

Bank

Country

Tier 1 capital ($bn)

1 2 3 4 5 6 7 8 9 10

ICBC China Construction Bank Agricultural Bank of China Bank of China JP Morgan Chase Bank of America Wells Fargo Citigroup HSBC Mitsubishi UFJ Financial Group

China China China China USA USA USA USA UK Japan

338 287 243 230 209 189 168 158 147 146

Source www.thebankerdatabase.com

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If we take the Top 50 World Banks 2019 made by The Banker, the largest Russian bank, Sberbank, occupies the 32nd position. Its Tier 1 capital is $54.21 billion. In 2020, the above-mentioned TNBs remain in the same rating positions. Sberbank’s branch network in the Russian Federation consisted of eleven regional banks and about fourteen thousand divisions in 2019. Subsidiary banks of PJSC Sberbank operate in Kazakhstan, Ukraine, Belarus and Central Europe (Germany and Switzerland), a representative office in Beijing and a branch in India have been opened. Considering the presented data, the largest Russian bank, PJSC Sberbank, can be ranked as a regional TNB. Besides, a significant part of other Russian large banks’ foreign divisions is located in the former Soviet republics, as well as in a very limited number of Western countries, which indicates an insignificant presence of Russian banks in the global financial market. The Bank of Russia publishes data on the activities of foreign credit institutions in the Russian Federation on the official website in its quarterly reports “Information on credit institutions with the participation of non-residents”. As of July 1, 2020, 132 credit institutions with the participation of non-residents in the authorized capital were registered and licensed to carry out banking operations in the Russian Federation. The size of non-residents’ participation in the total authorized capital of operating credit institutions as of July 1, 2020 was insignificant—about 14.28%.

Impact of Transnational Banks on the Emergence and Neutralization of Economic Crises Modern TNBs are the largest operators in various segments of the financial market. By their very nature, banks are primarily designed to accumulate, mobilize and redistribute capital (work as intermediaries), regulate money circulation and minimize financial risks for capital suppliers. But most TNBs are also active participants in international cash flows, including the securities markets, foreign exchange markets

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and financial derivatives markets, often carrying out high-risk and speculative transactions in order to achieve high performance indicators. Due to the negative impact of ineffective risk management and increased risk appetites both on the activities of TNB and on the entire global financial market, large-scale economic crises arise (Krugman, 2009). To understand why the largest operators of international capital markets have such a huge influence on the global financial instability, let us group the main reasons for economic crises of the twentieth and twenty-first centuries: – uneven distribution of capital in international markets, the problem of exporting capital from several countries, which, with an actual surplus of capital on a global scale, contributes to its deficit—the liquidity crises in national markets (Matyukhin, 2016); – currency speculation in international money markets in the context of non-fixed and flexible exchange rates after the abolition of the “gold standard”, the division of currencies into “strong” and “weak”; – speculative capital movement—the so-called hot money that has not found direct application in industry, trade and services; – priority for the largest banks to receive profit, rather than achieving equilibrium in the system “social significance and responsibility of the bank - risk - liquidity - profit”; – the growing instability of the financial sector caused by the excessive bank lending (economy “overheating”), the imbalances in lending to certain sectors and segments of the economy; – large-scale “financial pyramids” (the concept of “blowing up financial bubbles” is also widely covered by experts) in the stock markets and real estate markets; – a significantly decreasing value of assets, including those registered as collateral for bank loans, in the event of market overheating; – securitization of doubtful assets; – insufficient regulation and supervision over several economic entities in financial markets, which contributed to the “shadow” banking systems, whose organizations carried out unregulated financial transactions, which were essentially banking (e.g. the US trust and hedge funds’ unregulated financial transactions) (Krugman, 2009);

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– national banking systems are insufficiently protected from the external negative influence in global financial markets; – the controversial issues in assessing the effectiveness of the IMF’s recommendations to developing countries on achieving high rates of economic growth and overcoming economic problems (Krugman, 2009). Even though TNBs provoke economic crises, competitive banks also provide for overcoming crises and further developing the economy by taking, together with state and regulatory authorities, important and interrelated measures aimed at overcoming crises.

Anti-crisis Regulation of Transnational Banks on an International Scale When the Jamaican monetary system came into force and many countries refused to peg national currencies to gold (the Bretton Woods agreement on the “gold standard” was cancelled), we faced the highly volatile exchange rates, TNBs intensively rushed to the international market carrying out high-risk foreign exchange transactions. As a result of the liquidity crisis, several large international banks went bankrupt or became unprofitable in a short time (Matyukhin, 2016). In response to the crisis of international banking in the 1970s, BCBS (r. Basel, Switzerland) started to actively develop recommendations on financial and credit organizations’ anti-crisis regulation. The banking sector of industrialized countries realized that they had to create uniform rules for regulating the banking systems that would be acceptable on an international scale. BCBS approved three main packages of documents with recommendations and directives for banks: the so-called Basel I, Basel II and Basel III. Today, the BCBS oversight principles are binding on all G-20 countries. The BCBS recommendations, presented in the Basel III package of documents, deal with the bank capital’s structure and sufficiency, liquidity, advanced approaches in the field of risk management, the principles of effective corporate governance. Capital is precisely that part of

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the banking structure by which the bank’s shareholders directly guarantee its work. The higher the quality of equity capital, the higher the bank’s reliability. A competent risk assessment also plays a great role in banking, given the fact that banks carry out a lot of operations at the expense of clients’ funds (deposits, funds in current accounts), respectively, they should not pursue an unreasonably risky policy that would lead to losing the funds raised. Besides, national regulators have identified a range of systemically important banks (in addition to the list of global systemically important banks (G-SIBs) approved by the Financial Stability Board), whose activities are more closely monitored than those of other banks. If we take the Russian Federation, systemically important credit institutions as of October 29, 2020, include JSC UniCredit Bank, JSC Gazprombank, PJSC Sovcombank, PJSC VTB Bank, JSC AlfaBank, PJSC Sberbank of Russia, PJSC MKB, PJSC Bank FC Otkritie, PJSC ROSBANK, PJSC Promsvyazbank, JSC Raiffeisenbank and JSC Rosselkhozbank (the order of banks in the list is presented by the Bank of Russia in accordance with the bank’s license serial number). The above anti-crisis measures indicate the important role of regulating TNBs as well as systemically important financial and credit institutions, which indicates positive trends in achieving balance and financial stability on a global scale. Years of reform following the 2007–2008 global financial crisis have meant that the global banking system has become more capitalized and must be more resilient in the face of 2020 economic instability. Regulatory requirements introduced after the 2007–2008 crisis can prove their worth.

Regional Banks’ Areas of Activity Regional Banks’ Development from the Historical Point of View The activities of regional banks complement the activities of the largest banks operating either in several regions or throughout the country. This

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division is especially typical for the USA, where, taking into account the peculiarities of national and regional regulation, banks are legally divided according to the subordination level. If we take other countries, regional banks there include those with limited types of activities and peculiarities of organizational and legal ownership, for example, in Germany, there are land banks and savings banks, while in China, there are urban and agricultural banks, Kazakh banks do not have subdivisions in one of the capital regions (Almaty or Astana) and can have a small equity capital (Leonov, 2015). The Bank of Russia classifies the credit institutions that are not registered in the Moscow region as regional banks. According to the Bank of Russia, as of January 1, 2020, 442 credit institutions operate in Russia, of which 210 are registered in the regions (almost half of the total), while 232 of them are registered in the Moscow region. Over the past five years, the number of Russian banks has decreased by more than 50%, while most of them were registered in the regions. However, the reducing number of non-viable banks is not a unique national experience, similar trends can be found in international practice: this phenomenon is associated with the active mergers and acquisitions of regional banks by large banks. The same processes took place in Russia before the 1917 Revolution: local banks gave way to large banks that opened their branches in the regions. Regional institutions could not compete with them either in terms of capital or in terms of lending opportunities, which is why many local credit institutions were closed or transformed into branches of the capital’s banks. Capital concentration and centralization in Russia increased the number of large banks’ branches in the regions 21 times—from 39 to 82,217 during the period from 1885 to 1914 (Zverkova, 2012). At the same time, one can positively assess the experience of the city public banks in pre-revolutionary Russia, given their exceptional value for urban residents. The city banks were active in making loans to local merchants, industrialists and homeowners. During the period 1900–1914, the number of city banks increased from 241 to 317, and the volume of their resources grew from 136 to 258 million roubles. However, the share of urban banks in the money market was insignificant—less than 4% (Parusimova, 2004). Urban real estate loans

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dominated the city banks’ list of operations, but they often carried out risky and speculative operations providing local entrepreneurs and homeowners with large loans against unreliable collateral, which was also associated with the increased competition with regional divisions of large joint-stock banks. At the same time, city banks helped to meet the demand for lending to the urban population at a reasonable price, replenished the city budget by transferring significant amounts of retained earnings, provided loans to the city, including those at times when the city did not have other sources to cover costs, carried out charitable activities. The experience of urban public banks is valuable, first of all, taking into account the synergy effect, which was facilitated by the cooperation between the city authorities and banks, the approximate interests of banks, residents, small- and medium-sized businesses, the effective ways to resolve conflicts of interest between the bank management and city authorities. Despite the variety controversial points of view on the prospects of the modern Russian regional banks and the results of rehabilitating the Russian banking sector (Tsai, 2019), as well as the multidirectional proposals for approving the criteria for separating regional banks from the entire set of credit institutions, today, the following objective characteristics of their activities can be distinguished: Positive Aspects (Competitive Advantages) – forming a competitive environment in the region, making banking services more available for the population and organizations; – a real niche for the banks’ activities in the regions, the flexible interaction of regional banks with loyal subjects of the regional economy and the population; – banks’ management and employees are experts in the business environment, cultural environment, as well as the development of the region they deal with; – a certain range of operations are carried out in cooperation with local authorities and with their support; – the approach to regulating banking activities in the Russian Federation changed for the better in 2017, the legislation simplified the

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requirements of the regulator to comply with standards and reduced the volume of reporting for banks with a basic license, and, at the same time, clarified the list of permitted banking operations that carry acceptable risks. Negative Aspects – strong territorial differentiation of the regions’ economic development (Zubarevich, 2017) prevents the regional banks from developing effectively and makes their prospects unclear when carrying out activities in a subsidized or economically undeveloped region (according to the Bank of Russia as of January 1, 2020, there are no regional credit organizations in several Russian regions. It is the structural divisions of credit institutions registered in other regions of the Russian Federation who carry out all activities); – they deal with the concentration and centralization of the Russian banking sector and compete with branches of systemically important banks that are actively introducing new financial technologies with the support of the Bank of Russia. These facts affect the regional banks’ competitiveness; – low income of the regional banks’ main clients—small- and mediumsized businesses, the population; – a significant number of clients of the Russian banking sector have preferences in servicing high-tech and reliable large banks offering a wide range of banking products, implementing convenient remote customer service systems (Internet banking, mobile banking, mobile applications for investments, ecosystems and marketplaces) and participating in high-tech projects of the Bank of Russia (e.g. the Rapid Payments System), that is why people prefer to deal with the branches of systemically important and large banks (Volkova, 2019); – difficulties in the development of active, including high-quality lending operations due to the lack of small regional banks’ capital, which may force them to carry out high-risk and speculative operations, and keep on playing unfairly; – prevalence of short-term liabilities in the structure of attracted fund sources, which may cause difficulties in managing banks’ liquidity.

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The Main Reasons Why Regional Banks Stop Working According to the Bank of Russia, the share of regional banks in the total assets of the banking sector continued to decline in 2018 (from 9.3 to 9.1% with a further downward trend). A significantly lowering number of non-viable banks in the period from 2013 to 2020 was the result of the Bank of Russia’s policy to rehabilitate the Russian banking sector, including revocation of banking licenses (except for cancellation of bank licenses due to reorganization) and financial rehabilitation procedures. The Bank of Russia revoked licenses from Russian banks with the following wording: in connection with failure to comply with federal laws regulating banking activities and Bank of Russia regulations, the facts of material unreliability of reporting data, as well as the inability to satisfy creditors’ claims on monetary obligations. In practice, the revocation of banking licenses was caused by high-risk transactions carried out by Russian banks, negative capital and problem assets, as well as unfair banking practices and banking fraud (e.g. lending to affiliated, often insolvent organizations, withdrawing capital from the country). As a result of the banking sector rehabilitation policy, the concentration of the banking business in the Russian Federation has sharply increased (the share of assets of the Top 10 Russian banks exceeds 60%, there is a growth trend). The Bank of Russia says that concentration of the Russian banking sector can be compared to the processes taking place in Western Europe (the regulator said that “according to the widely used indicator of asset concentration, such as the share of the Top5 banks, Russia is in the middle of the range, typical for European states, and much closer to the countries with developed banking systems. The share of the Top5 Russian credit institutions from the point of view of the banking assets as of January 1, 2020 is 60.4% (if we take the statistics of January 1, 2018, it was 55.8%), while the indicators of 16 EU countries are significantly higher: the maximum concentration was recorded in such countries like Greece (97.0%), Estonia (90.3%), Lithuania (90.1%), while the concentration is lower in 12 EU countries including Luxembourg (26.2%), Germany (29.7%) and Austria (36.4%).”).

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New Bank of Russia’s Approaches to the Regional Banks’ Regulation Starting from June 1, 2017, under Federal Law No. 92-FL dated May 1, 2017 “On Amendments to Certain Legislative Acts of the Russian Federation”, a new structure of the banking sector operates in Russia within the framework of its proportional regulation system: 1. Systemically important banks, whose activities are regulated with additional requirements: additional standards and capital surcharges for systemically important credit institutions have been added to the rules of regulation of banks with a universal license, the latter are also allowed to apply advanced approaches to risk management when such approaches are approved by the Bank of Russia. 2. Banks with a universal license (the minimum amount of own funds (capital) is 1 billion roubles) can perform all types of transactions, including international ones, and are fully regulated under the BCBS standards (Volkova, 2020). 3. Banks with a basic license—the minimum amount of their funds (capital) can be 300 million roubles. The Bank of Russia has significantly simplified the regulatory process for such banks since they believe that their activities are less risky than those of systemically important banks and banks with a universal license. Besides, banks with a basic license will not be able to carry out very complex operations, including international ones. In our opinion, a significant number of advantages come along with the new approaches to regulating the activities of banks with a basic license: – the number of mandatory standards has been reduced to five; – technically complex international standards are allowed not to be used; – reduced reporting requirements, including reporting under international financial reporting standards, and reduced reporting volume; – international transactions are allowed to be carried out through accounts in banks with a universal license;

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– reduced requirements for information disclosure; – it is possible to combine the positions of the head of the internal control service and the risk management service; – a two-year cycle for assessing the quality of risk and capital management systems has been introduced (if we take the banks with a universal license, the regulator has introduced a one-year cycle for assessing the quality of their risk management systems); – a shortened list of indicators involved in the calculation of summary results for a group of asset and liquidity assessment indicators has been introduced; – it is allowed to carry out banking operations and transactions not provided for by this type of license until the previously concluded agreements are terminated, but not more than 5 years. According to the Bank of Russia, as of the new procedure on the proportional regulation of banks’ activities (July 1, 2017) entered into force, 230 banks with a capital of up to 1 billion roubles were operating in the Russian Federation. The Bank of Russia also reports the following information on banks with a basic license and on the banking activities in the regions at the end of 2018: – there were 239 regional banks at the end of 2018; – 149 banks with a basic license operated at the end of 2018. If we take the 149 banks with a basic license, the majority of them—102 banks—are regional; – the share of banks with a basic license in the main indicators of the banking sector is insignificant: they account for 0.4% of assets, 0.7% of capital, 0.3% of loans to non-financial organizations and individuals, 0.5% of household deposits. – in 2018, regional banks lost 227 billion roubles (in 2017 they received a profit of 55 billion roubles). However, this happened due to the negative financial results of certain large regional banks undergoing financial rehabilitation; if we exclude them, the regional banks remained generally profitable in 2018 (they made a profit of 87 billion roubles).

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– capital adequacy (own funds) of regional banks decreased in 2018 from 12.7 to 8.3%, which was also significantly affected by banks undergoing financial rehabilitation (excluding these banks, the regional banks’ capital adequacy ratio increased to 15.9%). Thus, as of January 1, 2019, 239 regional banks were operating in Russia, and 210 regional banks as of January 1, 2020, which is less than half of the total number of registered credit institutions. The regional banks were not profitable in 2018 due to the negative financial result of large regional banks undergoing financial rehabilitation. If we exclude this factor, the regional banking sector was profitable. However, the share of regional banks in the banking sector’s assets is insignificant with a downward trend.

Conclusions/Recommendations Transnational Banks TNBs are becoming more concentrated and the banking sector is becoming more universalized due to the consolidation that has dominated on a global scale in recent decades. TNBs have accumulated significant experience in the banking activities, including that in highquality risk management, introduced the latest financial technologies, worked in the conditions of qualified banking regulation and supervision, which is very important for building customer confidence as it is the basis of banking activities. According to the results of the study, it can be argued that TNBs and systemically important banks are the largest operators of financial markets and have a significant impact on them, both positive and negative, which requires improving the methods of internal and external regulation. In these conditions, we recommend to use the following principles to develop TNBs and regulate their activities:

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1. Implementation by national regulators, on the one hand, of a balanced monetary policy and macroprudential policy aimed at supporting the national banking sector and, on the other hand, consistent measures to regulate the work of systemically important banks, taking into account the growing risks of cyber fraud in the context of large-scale banks digitalization. In general, while positively characterizing the BCBS’s approaches to establishing new instruments for the global banking system’s macroprudential regulation, we recommend that national regulators apply their proposed instruments for regulating large national banks selectively, taking into account the state of the national economy, the banking sector and the monetary policy’s priorities. Besides, taking into account the international practice of overcoming crises in financial and credit institutions, we recommend to flexibly and timely apply the limits on systemically unstable financial markets, including setting the loan-to-value limits, income-gearing limits and sectoral capital buffers. 2. TNBs and systemically important banks are recommended to pursue a weighed good faith policy that balances the fundamental categories of “social importance and responsibility”, “risk”, “liquidity” and “profit”, which, given the important role of these credit and financial institutions in financial markets, will help reduce the risks of new economic crises. 3. TNB and systemically important banks are recommended to use the risk management system paying much attention to the role of the risk prevention method (analysing and assessing risks) over other methods of minimizing risks to prevent negative consequences of unbalanced decisions.

Regional Banks According to the results of the study, it can be said that the regional banks in the Russian Federation are generally unstable. At the same time, their positions are being strengthened in the background of reducing regulatory requirements and banks’ costs.

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In these conditions, we recommend applying the following principles for developing Russian regional banks: 1. Implementing an active stimulating policy for developing the regions to level territorial differentiation and eliminate the weakness of their economic development in comparison with the centre. 2. Preserve and improve the regional banks’ competitive advantages in their business segments (including servicing small- and medium-sized businesses in terms of the state program for supporting SMEs and the population, implementing effective projects in cooperation with local authorities). 3. Dealing with unfair banking practices. 4. Considering and applying the experience of large banks in the implementing successful projects for developing remote banking client services (Internet banking, mobile banking) and other projects aimed at digitalizing business to increase competitiveness and achieve a decent level of banking services.

References BIS. (2011–2019). Basel III: International regulatory framework for banks. Available at: https://www.bis.org/bcbs/basel3.htm. Accessed 1 December 2020. Central Bank of the Russian Federation. (2017). Presentation “Development of proportional regulation of the banking sector in the Russian Federation”— Federal law No. 92-FZ of 01.05.2017 “On amendments to certain legislative acts of the RF” . Available at: https://cbr.ru/Press%5Cpress_centre%5Ce vents/02062017.pdf. Accessed 1 December 2020. Central Bank of the Russian Federation. (2019a). Information about existing credit institutions with participation of non-residents. Available at: https://cbr. ru/analytics/bank_system/PUB_130701/. Accessed 1 December 2020.

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Central Bank of the Russian Federation. (2019b). On the development of the banking sector and banking supervision in 2018. Available at: https://cbr.ru/ Content/Document/File/72560/bsr_2018.pdf. Accessed 1 December 2020. Central Bank of the Russian Federation. (2020a). List of systemically important credit institutions. Available at: https://cbr.ru/press/pr/?file=29102020_141 842PR2020-10-29T14_13_19.htm. Accessed 1 December 2020. Central Bank of the Russian Federation. (2020b). Number of operating credit organizations, separate and internal structural divisions of operating credit organizations (branches) in the territorial section as of 01.07.2020. Available at: https://cbr.ru/Collection/Collection/File/29363/PUB_200701.pdf. Accessed 1 December 2020. Krugman, P. (2009). The Return of the great depression? World crisis through the eyes of a Nobel laureate. Eksmo. Lavrushin, O. I. (Ed.). (1999). Money, credit, banks: Textbook. Finance and statistics. Leonov, M. V. (2015). Regional banks in the Russian banking system. Journal of Spatial Economics, 2, 116–131. Matyukhin, G. G. (2016). World financial centers. LENAND. Parusimova, N. I. (2004). History of the monetary system of Russia: Textbook. State University of higher education. PWC. (2019). Global top 100. Available at: https://www.pwc.com/cl/es/ publicaciones/assets/2019/global-top-100-companies-2019.pdf. Accessed 1 December 2020. PWC. (2020). Global top 100. Available at: https://www.pwc.com/gx/en/auditservices/publications/assets/global-top-100-companies-2020.pdf. Accessed 1 December 2020. Slepov, V. A., & Zvonova, E. A. (Ed.). (2007). International financial market (Master’s degree). Moscow. The Banker. (2019). Top 10 World Banks 2019. Available at: https://www.the banker.com/Top-1000. Accessed 1 December 2020. The Banker. (2020). Top 10 World Banks 2020. Available at: https://www.the banker.com/Top-1000. Accessed 1 December 2020. Tsai, N. (2019). IA “Rosbalt”. Big Bank Safari: Choosing a victim. Available at: https://www.rosbalt.ru/business/2019/12/26/1820559.html. Accessed 1 December 2020. Volkova, E. K. (2019). Adaptation of higher education programs in the conditions of digitalization of banking business. Innovative technologies in modern education: A Collection of materials on the results of the VII International

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scientific and practical Internet conference, Korolev science city, Moscow region, pp. 117–123. Volkova, E. K. (2020). Development of regulatory requirements for universal banks in the process of implementing a new standardized approach to credit risk assessment. Journal Issues of Regional Economy, 2(43), 175–181. Zubarevich, N. V. (2017). Development of Russian space: Barriers and opportunities for regional policy. Journal Spatial Economics, 2, 46–57. Zverkova, T. N. (2012). Regional banks in the transformational economy: Approaches to concept formation. Monograph, publishing house “Agency Press LLC”, Orenburg.

Analysis of Banks with State Participation Functioning the Role of Development Banks in the Global and National Dimensions Vitalii Klevtcov and Artem Zamlelyy

Introduction Research on state participation in banks’ capital focuses on identifying the feasibility of such participation, the generated effects and the consequences. Financial markets and the banking system, determined by the digital economy’s features, play a significant role in society’s life, regardless of the type of financing of the economic system. Endogenous financing of the economy focuses on developing banking system institutions as the primary vehicles of capital overflow. Exogenous V. Klevtcov (B) · A. Zamlelyy Moscow State Institute of International Relations (MGIMO University), Moscow, Russia e-mail: [email protected] V. Klevtcov Financial University under the Government of the Russian Federation, Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_13

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finance defines the leading role of financial markets and actualizes its sector expansion tasks to ensure sustainability. Mixed financing enables harmonizing financial sources and activating favourable economic development opportunities, considering internal and external capital owners’ economic interests. On this basis, it is relevant to the role of banks with state participation, such as development banks.

Methodology The research aims to identify and reveal current theories of state-owned banks, to justify the role development banks play in both global and national dimensions. The research’s methodology is based on theoretical and empirical methods: theoretical analysis, synthesis, analogy, scientific generalization, the results of evaluating the development of state-owned banks in Russia and the functioning of development banks in both global and national dimensions. The research includes a theoretical review of regulatory and scientific materials on the development of state-owned banks using the example of Russia as a country with an endogenously funded economy, conducting an empirical study, systematizing the results and developing proposals.

Results Theories of State-Owned Banks There are three theories of state-owned banks (SOB): social, political and agency. Social theory of SOBs defines them as institutions for neutralizing market imperfections that solve underfunding social investments (e.g. Atkinson & Stiglitz, 1980; Stiglitz, 1993; etc.). There are views (e.g. Stiglitz, 1994) that state the need for state intervention in the economy, which is characterized by a lack of liquidity, a low level of public confidence, and fraudulent actions on the part of debtors. All these obstacles

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may be too much for the market to overcome on the way to the formation of the financial sector (Bruno et al., 2012). We believe that the popularized imperfections of the financial market—“market failures”— can only be a theoretical construction. On a long-term basis, the practice has not refuted the market’s ability to self-regulate. Government intervention in the economy through subsidies, grants, and other financial methods and instruments, including the ownership of the capital of economic entities, distorts the fair value of the factors of production used. For example, it can be hypothesized that quantitative easing, which is used as a situational (alternative) monetary policy tool that activates economic entities’ economic activity, has a strategic disadvantage. It consists of underestimating the fair value of the factor of production—“capital” (cash)—and potentially incubates factors that subsequently determine macroeconomic instability and (or) financial turbulence and even global crises. Political theory justifies SOB; the participation of state capital in banks is not to solve the underfunding of social investment, but to maximize the ruling elites’ personal political goals of the redistribution and the appropriation of rents derived from control over bank assets. The agency theory of SOB represents synthesizing views of social and political theories and proceeds from a compromise that is formed from the answers to the questions: Are there market imperfections that justify state participation in the bank’s capital, and what is most effective in eliminating existing market imperfections-subsidies or state participation in the capital?

Determinants of SOB Existence in the Modern Economic Context Based on our research, we conclude that an SOB, as a full-fledged (sometimes even dominant) participant in market relations, is the result of positioning the need to achieve the following goals: ● ensuring the security and stability of the banking system ● levelling market failures due to information asymmetry

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● financing social investments ● ensuring the population of isolated territories can develop financially and have access to competitive banking products and services The security and stability of the banking system, in our opinion, is a dangerous justification for state participation in the capital of banks. We recognize the unique role of banks in the economy and their following characteristics, including reformatting in the digital economy: – a reserve source of liquidity for other economic entities and a channel for transmitting monetary policy impulses (Fohlin, 2014); – fragility inherent in banks that, among other things, carry out socially significant intermediation—long-term financing through short-term deposits (Masciandaro & Quintyn, 2016); – high financial leverage ratios can determine the choice of investment objects by bank managers with higher risks than those preferred by the owners of funds placed in the bank. This line of thought is consistent with Diamond’s (1984); the problem of free access is relevant in bank monitoring, since the bank’s obligations are mainly the remit of small depositors who have minimal opportunities to control its activities. If institutions, norms, rules and procedures regulate the bank’s activities in current conditions, the state’s entry into the bank’s capital to ensure the banking system’s stability seems pseudo-dichotomous. It can be justified by the provisions of SOB political theory. There are two assumptions here worth highlighting. The first assumption is the institution of trust in society, which should minimize opportunistic goals and focus economic actors on reducing transaction costs and forming social capital. The second assumption is the economic system’s ability to generate a significant number of financial and credit pyramids, which are based on financial fraud technologies, the appearance of which is mediated by many factors, including the deformation of the institution of trust. We do not consider financial and credit pyramids a negative phenomenon, since we can identify financial and credit pyramids in most economic entities, particularly institutional investors—pension funds,

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insurance organizations, banks, etc. Any organization that forms its debt load also, in our opinion, bases the provision of its performance on the opportunities provided by financial and credit pyramids. The company’s debt is often generated to extract future cash flows that are not currently available. Each monetary unit of debt is converted into a potential increase in value. We share the point of view of Toprover (2007), who identified the main necessary components (in our opinion, signs) of credit and financial pyramids—the monetary base, the credit mechanism, the mechanism for issuing securities—although we would like to correct the last component. We believe that it is a financial instrument. This clarification is critical because pension funds, banks, insurance companies and other organizations do not always issue securities. However, a loan agreement that is a financial instrument, not security, allows identifying a financial and credit pyramid sign. Trust is an important characteristic for the state to have. The economic system’s ability to generate a significant number of financial and credit pyramids in a particular economic system may interfere with the provisions of the political theory of the SOB; this means satisfactory conclusions can be formulated only after additional research. Note that it is potentially possible to deliberately destroy the institution of trust through the pseudo-dichotomous justification that there is the “need” for state participation in banks’ capital and the extraction of benefits, according to the SOB’s political theory. The transition to a market economy in Russia was accompanied by the destruction of the institution of trust; distrust of most economic entities was scaled, and the state, as the primary guarantor (especially in conditions of instability), withdrew from most societal processes. This was accompanied by low competitiveness of industries, hyperinflation, debts on wages, social payments and benefits, depreciation of savings of the population, the growth of financial and credit pyramids based on financial fraud technologies aimed at deceiving citizens, etc. The need to level out market failures due to information asymmetry is determined by the fact that the banking business appears to be an information-filled sphere. The information accumulated by banks allows, by analogy with the hypothesis of Fama (1970), scientific views

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(Sharpe, 1964) to diagnose banking systems according to the degree of information efficiency as weak, medium and significant. Financing of social investments may be reduced due to limited incentives for banks to commit to financial projects that generate mainly external effects. An SOB can implement non-commercial goals, eliminate the problem of the banks’ underestimation of the countercyclical nature of monetary policy, and (in the context of emerging capital markets) complete the system of financing companies through their socially-oriented investments. Providing access to banking products and services to the populations of isolated territories may not be economically profitable for banks. The SOB is designed to fill the deficit of financial institutions and form the appropriate infrastructure for the financial development of territories and solve poverty.

SOB in Russia When formulating national goals, the state considers SOBs as an intermediary for their achievement; the state’s participation in the bank’s capital provides it with the opportunity to support strategically important and socially significant long-term projects that could otherwise be rejected, should the results of the project’s financial model be unacceptable in the ordinary course of a banking business. In fact, through the SOB, the state forms groups of potential borrowers who are financed based on state support, orients some banking system subjects to perform socio-economic tasks, and improves the welfare of bank users beyond bank owners. Domestic SOBs, as agents of state policy, implement both commercial (intermediary, cost, etc.) and non-commercial (social, developmental) functions, and participate in the formation of a particular structure of the banking system, in which the state is present both as a regulator and as a subject of a banking business. At the legislative level in Russia, the SOB functions and their roles are not regulated, which would reduce the gloomy background of possible manifestations of the SOB political theory’s provisions. We

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found that the banking system design, which includes the SOB, is typical for endogenously funded economic systems. Studying the activities of Russian SOBs, which have direct or indirect state participation, we conclude that they function as stabilizers of the banking system, accounting for more than half of the state’s assets. We believe that large-scale state participation in the banking sector, in tandem with the elimination of its participants through the mechanism of revocation of licences, can hinder competition, reduce the quality of services provided, and develop the banking system as a whole. This is especially dangerous due to globalization, the internationalization of financial markets, the development of digital economy institutions and the desire for a state of perfect competition in the global financial market.

Development Banks in Global and National Dimensions The end of the twentieth century can be characterized as finalizing the system most financial institutions take, as based on the principles laid down in Bretton Woods in 1944. Our research suggests that developing countries in these institutions are limited by voting distribution and capital subscriptions. This practice determines the predominance of developed countries and the creation of new development banks (New Development Bank-KFW, Asian Infrastructure Investment Bank-AIIB) as analogues of the IMF and the World Bank in terms of the set of tasks. In recent decades, changes in the global economy have included transforming the share of emerging market countries in global GDP, including the accumulation of a large number of foreign exchange assets placed in sovereign wealth funds and an increase in gold and foreign exchange reserves. At the end of the global debt crisis in the early 1980s, the World Bank and the IMF have harmonized their lending activities. The Asian financial crisis that broke out in 1997–1998 revealed the limitations of this practice. The new development banks featured major differences in several areas: in the structure of capital and votes (they adopted the principle of equality, whereas the Asian infrastructure investment Bank adopted the

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principles of traditional development banks); in approaches to providing resources; in models of cooperation with other financial institutions. In the national dimension, Russia’s case should be noted to weaken interaction with most traditional development banks and increase participation in the NDB and AIIB. We note that there are opportunities to use the potential of new development banks to achieve national interests, and there is a need to solve the problem of expanding the set of financing sources for capital-intensive infrastructure projects, but there has been little uptake of this opportunity.

Conclusions/Recommendations State intervention in the economy and economic entities, rather than solving issues, can instead be a factor of destabilization and of potentially deepening problems. Our point of view is that among other production factors, we have distinguished a new factor of production: risk, which is directly related to the pricing of financial goods and financial services. Each factor of production used in the creation of any product must have a cost. The absence of its fair cost, from our point of view, incubates economic problems. According to the study results, we believe that potential failures by banks, due to the mismatch in loan repayment by borrowers and the return of deposits to depositors, cannot justify the state’s participation in banks’ capital. A bank is a unique economic entity that concentrates the amount of funds raised, often exceeding its capital, and is subject to regulatory influence. This regulation is aimed at ensuring that its possible fragility is levelled. The information accumulated by banks allows for diagnosing banking systems according to the degree of information. In contrast to the hypothesis of Fama on the information efficiency of the banking system, we believe that banking information can be used to perform the role of a public good—to provide an impact on investment through: the impact on the volume characteristics of domestic savings; the cost of bank failures; the emergence of situations that require banks to solve problems of

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false choices and moral hazards (e.g. credit rationing); and the formation of the bank’s resource base through deposits. The dual issues of the weakening of international channels of capital inflows (against the background of sanctions, impacting the functioning of the Russian banking system), on the one hand, and the dominance of the SOB, on the other, can provoke atrophy of market institutions of the banking system. An SOB can use cheaper (non-market) financing sources and, as noted, provoke banking products’ unfair pricing, incubating economic problems. By diversifying its activities, providing them with stability, and withstanding macroeconomic instability, like any other bank that pursues commercial goals, an SOB can act as a conduit for strengthening the state’s participation in other areas of the economy through the acquisition of non-financial companies. We state that there is a risk of implementing the provisions of the SOB political theory. However, the non-commercial functions of SOBs in Russia do not conflict with commercial ones, the implementation of which can be identified by analysing the financial statements under IFRS—identifying the effectiveness and efficiency of the bank’s activities. The global financial crisis of 2007–2009 demonstrated the inability of traditional development banks (e.g. the IMF and The World Bank) to anticipate the crisis and take measures to counter its growth in global and national dimensions. The study of development banks—their role and significance for developed and developing economies—revealed that the emergence of new international development banks is determined by the discrepancy between the positions of developed countries or countries with emerging capital markets in the global economy, and their significance in the activities of traditional international financial institutions, in particular the IMF. We believe that, regarding Russia’s cooperation with international development banks, the country’s priority should be active participation in new banks, especially in terms of providing a resource contribution to the activities of the NDB and AIIB and the projects they finance. As a key shareholder, Russia should focus its activities on participation in

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new financial institutions, strengthening its position in the global financial system based on management mechanisms and the distribution of votes in new development banks.

References Atkinson, A. B., & Stiglitz, J. E. (1980). Lectures on public economics. McGraw Hill. Bruno, G., De Bonis, R., & Silvestrini, A. (2012). Do financial systems converge? New evidence from financial assets in OECD countries. Journal of Comparative Economics, 40 (1), 141–155. Diamond, D. (1984). Financial intermediation and delegated monitoring. Review of Economic Studies, 51(3), 393–414. Fama, E. (1970). Efficient capital markets—Review of theory and empirical work. Journal of Finance, 25, 383–423. Fohlin, C. (2014). Financial systems and economic development in historical perspective. In Forthcoming in Handbook of Cliometrics. Springer. Available at SSRN: https://ssrn.com/abstract=2524109 or http://dx.doi.org/10.2139/ ssrn.2524109. Masciandaro, D., & Quintyn, M. (2016). The governance of financial supervision: Recent developments. Journal of Economic Surveys, 30 (5), 982–1006. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19 (3), 425–442. Stiglitz, J. E. (1993). The role of the state in Financial Markets. In Proceedings of the World Bank Annual Conference on Economic Development (pp. 19–56). International Bank for Reconstruction and Development/World Bank. Stiglitz, J. E., & Boadway, R. (1994). Economics and the Canadian Economy. W.W. Norton & Company. Toprover, I. V. (2007). On the nature and properties of credit: The “family” of economic obligations and lending principles. Finance and Credit, 18(258), 31–36.

Insurance Companies: Prospective Business Models Natalia Adamchuk, Vladimir Osipov, and Lyudmila Tsvetkova

Introduction The development of the insurance market as a system suggests that the organization or architecture of this system can and should affect the effectiveness of its development. The elements of this system are insurance companies. According to Freeman, who considered the company as a set of parties involved into its activities, the management is to satisfy their conflicting requirements N. Adamchuk (B) · V. Osipov · L. Tsvetkova Moscow State Institute of International Relations (MGIMO University), Moscow, Russia V. Osipov e-mail: [email protected] L. Tsvetkova e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_14

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to maintain communication with each, as ensuring the existence of the company as a system (Freeman, 1984). Systems exchange signals have various elements; their accurate recognition provides an adequate response to such signals and the stability of systems. The approach applied (including an integrated approach) was aimed at summarizing the views of scientists, economists and insurance professionals; it reduced the signal’s characteristic of the insurance market to the following: 1. a signal from one insurer to another competing insurer, giving a direct or an indirect indication of the intentions, goals or internal situation of this insurer; 2. a signal in the insurance market may be a bluff (false signal) or warning, or 3. the signal in the insurance market acts as an indirect way of communication in the market. Savage, Nix, Whitehead and Blair spoke about the problem of assessing the different importance of each stakeholder in terms of the impact of their resources and behaviour on company development (Savage et al., 1991). Recognizing such views as fair, they defined the management task as that of creating a company’s strategy in such a way that its implementation would satisfy the needs of all stakeholders, taking into account everyone’s contribution to the common cause (Yanga et al., 2011). In the light of this, and from the perspective of a resource approach based on stakeholder theory (asserting differences in the importance of the company’s communications with each of them), promising business models were identified. A sufficient number of studies in foreign practice are devoted to the analysis of microinsurance (Biese et al., 2016; Brown and Churchill, 1999; Clarke, 2011) and others, and if earlier there was lack of understanding why someone would need insurance products (Braun et al., 2006; Kunreuther et al., 2013; Zaman, 1999), then the development of technology helped to fill this gap and create a digital insurance landscape.

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Method The problem-oriented method of studying the insurance market and the processes associated with digitalization helped us to identify the need to use general scientific and special methods, as well as economic research tools, when analysing the formation of its architecture, the organizational form of the insurer, and promising business models; the institutional analysis method, and a set of scientific techniques of abstract-logical and qualitative methods, were the main provisions of the resource theory as the basis of strategic management. The method of analysing market architecture requires assessing market signals (Spence, 1973, 1974): ● the signals generated by stakeholders of insurance organizations may result in signals of readiness to exchange resources for the desired preferences; shareholders, as suppliers of capital, expect profit; ● insurers, as providers of insurance capital, expect the payments exceeding paid premiums; ● the state, providing the insurance company with the right to conduct socially significant business and providing institutional values for it, expects the budget to be exempt from sudden expenses to help victims; ● hired managers, providing key competencies that ensure effective decisions in favour of other stakeholders, rely on their high payment both in the form of wages and bonuses. Signals about the need for insurance products from consumers working in the conditions of a lack of financial resources confirm the need for new insurance models: 1. microinsurance is becoming a new market driver; 2. this business model promotes wider access to financial services since insured citizens, households and farms are considered more solvent; 3. microinsurance allows the formation of methodological approaches to the development of this form as an important tool of states to solve the problems of economic development.

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According to Russian researchers Kotlabovsky, Tsyganov, Bryzgalov, Malkovskaya, and Adamchuk (Adamchuk, 2019; Malkovskaya, 2019; Kotlobovsky et al., 2017; Tsyganov & Bryzgalov, 2018), as well as foreign ones (Piroozram, 2017), today, a new type of consumer has emerged. This new type of customers was formed by IT, so a significant signal is the one associated with the need to simplify communication. These new technologies, on-demand products, and those that use peer-to-peer insurance (P2P) highlight this trend (Lee, 2018; Raisbeck, 2017). A response to the stated need is the trend towards digitalization of insurance activities, leading to: 1. increased competition in the insurance market due to the increasing number of InsurTech not regulated by insurance legislation; 2. the appropriateness of classic insurance companies to more actively increase both operating and user efficiency, based on AI and automation of the processing of insurance applications and claims according to IoT. Another signal from the consumer is a request for the most individualized insurance product, taking into account consumer interests. In reviews (Ansari & Riasi, 2016), it is noted that traditional insurers are beginning to actively use intelligent insurance to meet such a need.

Results An analysis of the insurance market’s architecture showed that for the insurance market, as for any other market, the number of sellers and buyers operating within it is important, and the development of the market is a synergistic result of satisfying the needs of all its participants. Buyers of insurance policies (policyholders) find themselves in cramped conditions when their interests are not taken into account during the development of an insurance product. That is why customers are less satisfied with insurance services, which in turn reduces the demand for insurance. The state policy in insurance should be focused on expanding the range of insurance services, which is impossible without

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increasing the number of insurance companies. An important criterion for analysing the architecture of the insurance market is the size of insurance companies, policyholders and their market share. It is important to note that the enlargement of insurance companies is a result of both mergers and acquisitions, as well as of curtailing the activities of small insurance companies, which occupy an insignificant position in the market. To characterize the architecture of the market, it is essential to evaluate not only the influence of the insurance service on the market price but also the actions contradicting the antitrust laws. Another important characteristic of the insurance market architecture is the freedom of entry and exit from the market; this refers to how easy it is to enter and to exit the market depending on the decision is made by shareholders/participants of the company. Huge authorized capital, special legal capacity and restrictions on engaging in activities other than insurance have a significant impact on freedom of entry into the market, which to a large extent can affect the decision to invest in the insurance market. The degree of freedom to withdraw from the insurance market (i.e. going out of business) characterizes the investor’s ability to reinvest the capital into another type of activity. If the withdrawal from the insurance market is accompanied by additional costs, such as fines or administrative costs associated with control and supervisory measures, the investor has additional incentives not to invest in such a market. The permitted list of insured risks is essential for analysing the market architecture. The common law system is characterized by the provision that everything that is not expressly prohibited by law is allowed. As for the system of continental law, it is better to talk about the need for direct permission to act (Silvestrov et al., 2015). In terms of the insurance market, this translates into formalizing the regulatory legal acts of those risks that can be insured in this jurisdiction. Accordingly, in the second case, insurance products turn out to be more standardized; they take into account the features of a particular insurer and his situation to a lesser extent. In addition to the degree of freedom of entry and withdrawal from the insurance market, it is important to assess the presence and size of the

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barriers in the insurance market of national jurisdiction. Thus, administrative pressure, corruption in the control system and supervision can affect the development of the insurance company when, due to the high corruption of the supervisory authorities, the insurance company may violate the law to the detriment of the policyholders’ interests. The opposite is also possible when administrative pressure necessitates winding up a business and surrendering a license for insurance activity. Such risks of the insurance business have a great influence on the decision to invest in the insurance market. The identified signals—characteristic of the insurance market—show that the connections between its participants are an essential element of architecture. The unfavourable psychological environment in the structure of the insurer, as well as low wages, can give a signal to the market that highly professional specialists from this company can be employed by other insurance companies. This affects the work of both headhunters and HR departments. It is important to evaluate the quality characteristics of the insurer’s signal: whether the signal is true or false and is aimed only at hiding the real goals of a particular insurer. Such signals become indirect ways of communication in the market; they activate the mechanism of the insurance market from the standpoint of prices, the range of insurance services, service quality, etc. Recognition and interpretation of the signals in the insurance market are becoming very important in the methodology of the insurance market architecture analysis. The result of the analysis of the insurance company’s optimal organizational form, depending on the key resource for its functioning, is the following. The Mutual Insurance Society is the best way to form a guarantee fund. Such a society is the main point to protect the interests of the policyholder as a key stakeholder. In general, MIS includes its insurers who compensate the losses incurred to the extent and time when these losses occurred, without losing, however, the rights to get the premium or its part if the losses were less than the established insurance fund. In the case when the founders-shareholders are the key stakeholders, taking into account the risk to their capital, the best form of capital protection is starting Limited Liability Companies, since each participant can withdraw its share of capital in its original volume. However, this circumstance poses a threat to policyholders, since the authorized capital must

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assume the entrepreneurial risks of the insurer, and its reduction affects the security of policyholders. The form of the Joint Stock Company best protects the interests of managers, making it easier for them to establish consistent relations between those policyholders who have formed an insurance fund and those who provide profit to the shareholders, who at the same time have the opportunity to extract their capital only by selling shares. However, with such an organizational form, when the owners cannot run the business, there is an “agent conflict”, which deserves special attention when choosing the organizational form of the insurance company. The essence of the conflict described by Jensen and Meckling is that, in pursuit of their interests, the manager focuses on such indicators of the company’s activities (such as the correlation of risk and return on assets), which maximizes their interests, although they may not be optimal for other stakeholders, in particular for the shareholders who do not run the company (Jensen & Meckling, 2004). Analysis of prospective insurance models shows that microinsurance, being one of the microfinance segments, is becoming a more popular model of insurance coverage for low-income households, farmers, businesses and the poor. A serious interest in microinsurance in developing countries has been noted with the development of microfinance programs. Chua et al.’s study (2000) emphasizes that, along with microfinancing, microinsurance increases security by reducing vulnerability to unforeseen circumstances, increasing resistance to shocks. The “Strategy for the Development of Insurance of the Russian Federation until 2020” also defines the need to expand insurance services for the disadvantaged. This makes sense since microinsurance often includes insurance against risks, such as the loss of a breadwinner or the death of livestock, medical expenses, funeral expenses or property damage from theft/fire. These risks are usually autonomous, i.e. they do not cover the entire region or all-risk pools at the same time. A comparative analysis of microinsurance and traditional insurance by the authors showed that there are no strict distinctions between them, but the features highlighting the products of the first are noted (Churchill, 2012); these are: low insurance sums and premiums, simplified underwriting, and easily comprehensible terms of

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insurance and compensation for the damage that contributes to the rapid performance of the compensation duties by the insurer. Understanding the nature of poverty and customer risk management strategies developed on this basis can help to design products and services that are suitable for different groups of users. As our study shows, the desire to increase profits stimulates competing insurers to provide profitable offers to consumers, which becomes especially relevant if the demand for specific insurance products can be offered for various layers of society. But, as Hulme and Mosley rightly note (1998), the poor, as a heterogeneous group, are provided with personalized microfinance products. It seems that the provision of microinsurance should be carried out on the same principle. To ensure this, different models can be applied. Some experts identify three models (Chandani, 2009), while the authors of this study argue that there are at least four. The first model is the joint provision of both traditional and microinsurance with the support of public organizations. The second partneragent model implies the participation of the insurer and their partner in the joint development of products. The motivation for this model is to use the strengths of both parties. The partnership allows the product to cover that part of the population which would be difficult or impossible to access without a partner dealing with the target market. In turn, the insurer covers the risks of the agent providing the product. Such a partnership increases the availability of a product/service, reducing transaction costs. The third model involves mutual insurance principles. The difference between this model and MIS is that it is an association of people only with uniform risks (community-based schemes). Such risks can be managed by both microfinance organizations and cooperative societies, as well as non-governmental organizations that absorb them. With the development of digital technologies, we can see the fourth (“Provider”) model, in which microinsurance becomes a platform for classic insurance services (freemium service). Insurance has embarked on a path of new technological development, and many insurance companies use it to increase market share due to changes in the insurance value chain.

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Conclusion The study allows us to confirm that the stability of an insurance company is the result of a synergistic combination of the entrepreneurial interests of all its stakeholders, recorded as the signals they give. Such a consistent association is the main task of management. The result of the analysis of stakeholders’ resources, taking into account risks, may help with the choice of the insurance company’s organizational form. Since the sustainability of the insurer’s development as a financial intermediary depends on the competencies of its management, the form of a joint-stock company is recognized as the most effective one. An agent’s conflicts, connected with the organizational form that ensures management interests, can be resolved through the emergence of the “entrepreneurial management” paradigm (Meskon et al., 2009), the essence of which is to combine the private interests of employees with the interests of the company, which can happen when employees consider it as an object of their business. The signals of a consumer operating with a lack of financial resources make the development of microinsurance promising as a new driver of the insurance market, which is becoming an affordable way to minimize the vulnerability of citizens to adverse events, is already being confirmed in practice. This insurance model allows its user to fill in the gap between those who can use conventional insurance products and those who receive social protection. Changing preferences among customers, including millennials (one of the largest age groups who prefer simple and fast digital interaction), has led to an increase in the use of digital channels and technologies such as “telematics”, “Internet of Things” (IoT) and artificial intelligence (AI). In turn, these processes have stimulated the development of new insurance models based on data and analytics. As partnerships with providers expand, an important model of digital insurance is the provision of freemium services, which offer free insurance products with minimal coverage, such as health insurance, in addition to mobile operators’ services, thereby not only providing insurance coverage but also increasing customer awareness of insurance, reducing fraud. At the same time, subscribers have the opportunity to

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choose additional insurance in a drop-down menu or a voice response system on phones or by contacting a call centre. This model successfully works beyond the microinsurance segment, providing travellers with cover against accident, insurance of the phone itself, etc. The development of digital interaction through personalized responses in real time, and social media as a new digital trend used, including for comments and assessments when choosing an insurance company and products, encourages insurers to switch from protective to preventive business models. The introduction of telematics’ solutions allowed us to develop a promising UBI (Usage-Based Insurance) model, which offers highly dynamic products divided into micro-coating elements. The combination of telematics with IoT gave away to smart insurance. To select personalized content, products, cross-selling and companies, traditional insurers are increasingly resorting to using artificial intelligence (AI). AI algorithms instantly create risk profiles, so the cycle time to purchase an insurance plan is reduced to minutes or even seconds, thus making insurance more attractive, contributing to the development of the industry market.

References Adamchuk, N. (2019). New drivers of the insurance market. Journal of Insurance Business, 3(312), 31–34. Ansari, A., & Riasi, A. (2016). Modeling and evaluating customer loyalty using neural networks: Evidence from the startup insurance companies. Journal of Future Business, 2(1), 15–30. Biese, K., McCord, M. J., & Sarpong, M. M. (2016). The landscape of microinsurance Africa 2015. Microinsurance network, Munich Re Foundation and microinsurance centre. Available at: http://www.microinsurancecentre. org/resources/documents/the-landscape-of-microinsurance-in-africa-2015. html. Accessed 25 December 2019.

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Braun, M., Fader, P. S., Bradlow, E. T., & Kunreuther, H. (2006). Modeling the “pseudo deductible” in homeowners’ insurance. Journal of Management Science, 52, 58–72. Brown, W., & Churchill, C. (1999). Providing insurance to low-income households: Part 1: A primer on insurance principles and products. USAID. Chandani, T. (2009). Microinsurance business models. Available at: http://sit eresources.worldbank.org/EXTFINANCIALSECTOR/Resources/2828841242281415644/Microinsruance_Business_Models.pdf. Accessed 9 January 2020. Chua, R. T., Mosley, P., Wright, G. A. N., & Zaman, H. (2000). Microfinance, risk management, and poverty. The World Bank. Available at: http://docume nts.worldbank.org/curated/en/610041468743654905/pdf/wdr27900.pdf. Accessed 20 December 2019. Churchill, C. (2012). Protecting the poor: A microinsurance compendium. Munich Re Foundation (Munich, Germany) and International Labour Office (Geneva, Switzerland), Volume II. Available at https://www.mun ichre-foundation.org/dms/MRS/Documents/ProtectingthepoorAmicroinsu rancecompendiumFullBook.pdf. Accessed 5 January 2020. Clarke, D. (2011). Insurance design for developing countries. Trinity. Freeman, E. (1984). Strategic management: A stakeholder approach. Pitman. Hulme, D., & Mosley, P. (1998, May 5). Microenterprise finance: Is there a conflict between growth and poverty alleviation? World Development (Vol. 26). Available at: https://www.sciencedirect.com/science/article/abs/ pii/S0305750X98000217. Accessed 9 January 2020. https://doi.org/10. 1016/S0305-750X(98)00021-7. Jensen, M. K., & Mekling, U. H. (2004). Theory of firms: Behaviour of managers, agency costs and structure of property. St. Petersburg University Bulletin, 2(4), 118–191. Kotlobovsky, I. B., Shestakov, D. B., & Kirichenko, N. I. (2017). Innovative information technologies for the insurance industry. Journal of Finance Magazine, Finance Publishing House (Moscow), 9, 38–44. Kunreuther, H. C., Pauly, M. V., & McMorrow, S. (2013). Insurance and behavioral economics. Cambridge University Press. Lee, J. (2018, February 19). Takaful and the opportunity for Peer-To-Peer insurance. Brink News. Available at: https://www.brinknews.com/takafuland-the-opportunity-for-peer-to-peer-insurance/. Accessed 25 December 2019.

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Malkovskaya, M. A. (2019). Insurance digital agenda: overcoming challenges. Available at: http://www.insur-info.ru/interviews/1339/. Accessed 16 January 2020. Meskon, M., Albert, M., & Hedouri, F. (2009). Management bases. HarperCollins. Piroozram, M. (2017). The five insurtech battles. Available at: https://www.dig italinsuranceagenda.com/author/mehrdad-piroozram/. Accessed 16 January 2020. Raisbeck, M. (2017). Is P 2P insurance a sustainable business model? Available at: https://home.kpmg/xx/en/home/insights/2017/09/is-p2p-insurancea-sustainable-business-model.html. Accessed 16 January 2020. Savage, G. T., Nix, T. W., Whitehead, C. J., & Blair, J. D. (1991). Strategies for assessing and managing organizational stakeholders. Academy of Management Executive, 5 (2), 61–75. Silvestrov, S. N., Zeldner, A. G., & Osipov, V. S. (2015). Introduction to the theory of economic disfunction. Mediterranean Journal of Social Sciences, 6 (3), 394–399. Spence, M. (1973). Job market signaling. Quarterly Journal of Economics, 87 (3), 355–374. Spence, M. (1974). Market signaling: Informational transfer in hiring and related screening processes. Harvard University Press. Tsyganov, A. A., & Bryzgalov, D. V. (2018). Digitalization of the insurance market: Tasks, problems and prospects Financial University. Available at: https://cyberleninka.ru/article/n/tsifrovizatsiya-strahovogo-rynkazadachi-problemy-i-perspektivy. Accessed 16 January 2020. Yanga, J., Shenb, G., Bourne, L., Ho, C., & Xue, X. (2011). A typology of operational approaches for stakeholder analysis and engagement. Construction Management and Economics, 29 (2), 145–162. Zaman, H. (1999, July). Assessing the poverty and vulnerability impact of micro-credit in Bangladesh: A case study of BRAC (Policy Research Working Paper Series 2145 ). The World Bank.

Insurance of Financial and Credit Institutions Natalia Adamchuk, Vladimir Osipov, and Lyudmila Tsvetkova

Introduction Investments are an important component of GDP, and their increase provides economic growth. Understanding this fact has a direct impact on the economic policy of any state. The desire to ensure the flow of investments (private, domestic and foreign) contributes to creating special institutional policies aimed at stimulating and/or revitalizing the investment process. The essence of institutional policy, in this case, is to develop investment priorities (Bogoviz et al., 2018), create favourable N. Adamchuk (B) · V. Osipov · L. Tsvetkova Moscow State Institute of International Relations (MGIMO University), Moscow, Russia V. Osipov e-mail: [email protected] L. Tsvetkova e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_15

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conditions for investments, reduce administrative barriers and streamline state control and oversight activities, and ensure an effective judicial system that can protect private property rights (Osipov et al., 2017). These are the general factors of institutional policy, special factors should also be kept in mind, among which there are industry priorities (Zeldner, 2019) and investment tools. Long-term financial assets play a fundamental role in ensuring higher growth and welfare. Without this, investments cannot be made, especially those into complex infrastructure projects. The largest investment inflow can be achieved through large projects related to updating or creating new infrastructure; large-scale projects, though, also require special structuring of all participants’ activities, financing of the project using specific mechanisms. However, it is often difficult to mobilize the private sector’s capital and institutional investors, not only because of income inequality but also because of a low insurance culture. Smith attributed the nature of poverty to subjective assessments of one’s position as a feeling of social shame for one’s inability to adhere to generally accepted standards of consumption (Smith, 2016). Townsend defined such poverty as qualitative, agreeing with its relative nature (Townsend, 1979). In the nineteenth century, the criterion of absolute poverty was introduced. It was associated with such a level of income that ensured that the individual’s needs for only maintaining his working capacity and health were satisfied (Foster et al., 1984). It is known that the state of poverty can be either permanently renewable (i.e. chronic) or temporary (arising after an accident, extraordinary circumstances or difficult periods of family life). Acquiring a loan in conditions of poverty can be considered as an opportunity to get out of adversity by creating an independent enterprise or entrepreneurial activity as a source of income. However, in this case, it can only be secured by an insurance policy. An objective opportunity to repay a loan will be the insured entrepreneurial activity, which can only be prevented by an “insured event”, but payment will require additional costs from the borrower.

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Linking the state when the household is not ready to divert funds to insurance with definitions of economic poverty, so-called insurance poverty (Zubetc, 2001) is related to economic poverty as follows: – in conditions of absolute chronic poverty, a household cannot be a borrower, because payment for insurance of borrowed obligations will reduce the vitally necessary consumption, and members of such a farm will be “trapped in poverty” without being inclined to entrepreneurship (Kovacevic & Semmler, 2020); – an incentive for acquiring insurance in conditions of relative poverty may be the opportunity to improve its distress with the help of acquired loans that require insurance guarantees, and the impossibility of acquiring them is identified as a manifestation of poverty only in societies where the bulk of insurance contracts is the norm (Wolff, 2019). It turns out that “insurance poverty” is not a state of an individual household or group of households, but a state of some society in which there is no tradition to use this tool to solve the problem of increasing wealth (Kovacevic & Semmler, 2020). A solution to the problem can be found in public-private partnerships that contribute to the expansion of investment activity (both through the distribution of risks and through joint [state and business] decisions on how to provide the public with public goods).

Methodology To conduct the study, the method of joint analysis was used, looking across time at selected indicators for characterizing the incomes of the Russian population. At the same time, there was the basic assumption that the qualities of a good borrower are present among the people who are prone to savings. The hypothesis of a joint propensity to save and to ensure, able to protect both savings and acquired credit, was tested.

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The analysis revealed a correlation between the dynamics of changes in the share of savings and the average per capita income of the population (Fig. 1). It can be seen on the graph that the share of savings grew fastest in 2015 after the threat of an economic recession that was to start after sanctions were imposed. Savings were made by households at the risk of lowering their stable permanent income (Friedman, 1957) to maintain a standard of living. An assumption was made that if the propensity to save is growing when there is the risk of permanent income decreasing, then there should be a correlation between the dynamics of savings and the demand for insurance. The statistical analysis confirms this hypothesis (Fig. 2). The hypothesis was confirmed; it was shown that insurance is considered as a tool to maintain the standard of living for those consumers who 2.50 2.07 2.00 1.50 1.12

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are interested in maintaining the “permanent income” when there is a risk that it can decline, to prevent the transition to “absolute poverty”. In this regard, the demand for mechanisms expanding access to the credit market comes to the fore. Among such mechanisms, infrastructure mortgage stands out. A mortgage is a form of lending secured by the property created. This becomes especially true in the context of using analytical technologies in the economy. Institutional analysis, as well as analysis, synthesis and comparative analysis are used as the main methodological approaches in the study of the role of insurance in implementing infrastructure mortgage projects. The methods of systematic and comparative analysis, qualitative assessments and an integrated approach aimed at summarizing the existing risk management practices allowed us to determine the role of insurance companies in the practical approaches of risk management institutions to manage the risks they face in the conditions described above.

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Providing the theoretical basis for the analysis of those risks to which the activities of financial and credit institutions and their management are exposed, the works of Pechalova, Adamchuk, Panova and Tsvetkova were used (Voitsekhovich & Adamchuk, 2017; Panova, 2018; Pechalova, 2015; Tsvetkova, 2019). To systematize and interpret the results of research conducted by economists, regulators and professional risk managers (Borio & Filosa, 1994; Lamarre et al., 2010), particularly those who identified and proposed techniques and methods of controlling entire risk management systems of financial and credit institutions, both abstract logical and complex analysis were chosen as research methods.

Results To engage households at a relative poverty level in insurance, it is necessary to focus on the insurance products that can increase the consumer’s ability to provide themself with additional income (Bohn, 2018). This is usually possible when obtaining a loan. Depending on the financial situation of the household in terms of poverty, from these positions, it is possible to propose appropriate types of insurance contracts. 1. The cost of insurance for households that are not included in the “poor” category has little effect on fears of lower consumption when deciding on a loan. Moreover, the insurance mechanism may provide for a significant amount of deductions from the reimbursement, providing protection only for the losses exceeding the financial capabilities of the consumer and at the same time reducing the insurance fee. 2. In cases of households whose permanent income is “slightly above the threshold of absolute poverty”, the premium paid for collateral or borrower liability insurance is compared in terms of its utility with potential payments and based on an individual utility function. The following mechanisms are proposed to increase the usefulness of insurance to transfer this group of farms to the “good borrowers”:

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– state support for subsidizing a part of insurance premiums for the households that have slightly overcome the threshold of relative poverty (following the model of agricultural insurance contracts with state support), because government subsidies will be significantly lower than the compensation for potential losses from the budget if these households become poor; – providing the possibility of insuring the borrower’s liability of microloans for the households that do not have a significant guarantee for getting it to ensure that they receive additional income from entrepreneurial activity. Infrastructure mortgages obviously relate to the fact that the created infrastructure acts as a pledged object. Such facilities are formed based on concessions, and financing is secured by collateral. At the same time, the choice of collateral is very important. In the case of concession, it can be budget guarantees (state guarantees) that will serve as collateral, while the infrastructure mortgage improves security deposit using collateral, as well as insurance of the subject to mortgage. It is insurance that helps infrastructure mortgage as a mechanism of a public-private partnership to develop and expand its presence in the investment products’ market. Insured collateral securities become low-risk and profitable (after all, the return on investment is carried out by paying for the use of public goods—the created infrastructure). A comparison of the insured collateral object and the uninsured, from the investment point of view, gives higher risks in the second case, but also higher profitability due to lower costs (insurance costs of the collateral object). On the other hand, the insured collateral object gives lower profitability but provides a significantly lower risk. Risks are assumed by insurance companies or the insurance pool. It is important to note that taking on the risk of the insurance company also makes it control the project execution. The insurance company will have a direct interest in completing a new infrastructure or improving the old one since the risk of failure will entail insurance payments, which the insurance company is not interested in. Thus, the insurance company dealing with infrastructure mortgage projects can act not only as a passive risk insurer but also as an active participant assuming the function of monitoring the project.

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That is why insurance companies are advised to take part in infrastructure mortgage projects; it is not only the risks of failing the project, but also several other risks that could be attributed to the operational ones (construction quality, terms of the project, logistics, legal risks, etc.), which will be removed. Using a special knowledge of insurance companies reduces the risk of the project’s failure and it will more likely to be completed in the best configuration. The government also observed a positive agenda with the insurance company participating in the infrastructure mortgage project (Peery, 1995; Post et al., 1996). Even if the state acts as an investor, the investment body will be returned if the project is not fulfilled or is completed unsuccessfully. The developer dealing with the infrastructure mortgage project also consolidates their confidence in its successful completion and its financing, as the insurance company will strive to reduce legal risks, including those associated with excessive administrative pressure. This makes it clear that the insurance company in the infrastructure mortgage projects acts as a substitute for trust, which is scarce in emerging markets. The problem of trust is often the main obstacle to the investment process, since neither the state, nor the business, nor society itself are confident in each other’s actions when they fulfil the project (Azfar & Cadwell, 2006; Hosking, 2011). A lack of trust is a powerful barrier to expanding investments into emerging markets, and this factor ultimately leads to dampened economic growth. However, the transfer of risk on credit and mortgage operations to insurance companies reduces these barriers, and taking into account the fact that new technologies are now emerging, the efficiency of financial and credit institutions is being increased. This happens because all the information is obtained directly from large technology platforms, including transactions (sales volumes and average selling prices); information about the reputation (the ratio of claims, processing time, reviews and complaints) and industry characteristics (seasonality of sales, demand dynamics, macroeconomic sensitivity) now form the basis of the decisions made by the bank on lending, as well as when agreeing on the insurance of banks’ credit risks (entrepreneurial risks) and credit insurance by the lender. They can be supplemented by the unstructured data obtained through social networks and other channels. On the other hand, the practice has shown that the more

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data collection and exchange points, the more potential targets exist for attackers; this is why more new technologies (e.g. machine learning and artificial intelligence (AI)) are needed. Since the financial institution is obligatory for those who use the aforementioned insurance products, insurance companies cannot but be interested in the risk profile of those with which they cooperate. In particular, insurers cover such traditional risks as damage to movable and immovable property, financial and business risks, employee’s life insurance, liability insurance for fulfilling the obligations of financial and credit institutions (deposit insurance, money and valuables in cells, etc.) and so on. However, the integral risk of a financial institution depends not only on external factors but also on internal sources. In parallel with the development of technical capabilities that improve the operational and informational capabilities of banks, the range of risks accompanying their activities has changed. The financial institutions that people turn to in everyday life have seen technological changes since the 1960s, when the MICR code was recognized for automated check processing, i.e. banking was one of the first sectors of the economy to introduce digitalization. As IT developed, ATMs appeared, and insurers began to cover the risks associated with bank cards. Thus it would seem that the risks of digitalization should be familiar to financial and credit institutions and understandable for their managers. However, the revolutionary technological transformation taking place in the economy today has led financial institutions to not only ever-increasing competition with digital companies and FinTech startups but also to still unknown digital risks (Frost et al., 2019; Hornuf et al., 2018). The authors of this study define digital risk as an unexpected and undesirable event for an object that uses digital business processes and related technologies to carry out its activities, the consequences of which are material losses. Increasing consumer demands and changes in interaction with new generation customers have led to the need to upgrade the technological infrastructure providing automation of responses, for example, to retail and corporate credit solutions, as well as the simple and quick opening

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of an account on the Internet, where most of the requested data can be obtained from open sources. New methods for collecting, transferring and owning virtual assets, as well as the architecture and diversity of big data, pose additional risks in terms of generally accepted classifications, not all of which can be considered insurance. Operational risks, in most cases, are associated with insufficient control and data management (Kasperskaya, 2018; Yakunina & Popov, 2018), and this fact sets unique problems: How one can identify, measure, control and mitigate such risks as, for example, cybersecurity, reputation risks or risks of confidential data loss? To solve these problems, governments of several countries have begun to carry out serious reforms concerning the policy regulating personal data protection. Although it is impossible to counter cyber threats, the consequences of these can be mitigated. It is in this sphere where new prospects for new insurance products arise, the effect of which develops in two directions: – increased protection of banks from the losses caused by digital risks; – higher security of insurers purchasing “convergent” insurance products. Cyber insurance introduces a new product that protects the operator of third parties’ data from possible costs and any direct losses associated with data breach (both from external threats and due to a failure in its own IT infrastructure). The programmes provided by insurance companies to protect against cyber risks may vary, but the main risks—such as liability for violation of personal data and corporate information, risks of virtual extortion, fraud and damage, interruption of the company after DDoS attacks, etc.—are covered by most of them. The situation is aggravated by the fact that many organizations continue to use outdated IT systems. That is why, when insuring against cyber threats, it should be understood that this protection is “secondary”, in comparison with the measures for providing the company’s cybersecurity. This is true because the cornerstone of insurance is the principle of highest integrity on the part of the policyholder in relation to the insurer, as they are more aware of the transmitted risk.

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While cyber insurance programmes are quite new, in the banking sector, there is a long-standing practice of a comprehensive professional liability insurance policy that provides insurance protection against the claims for losses incurred by customers of a financial institution as a result of unintentional erroneous actions, inaction or the negligence of its employees (Bankers Blanket Bond, BBB). As for Western countries, the CEO and officers’ liability insurance policies are very popular (Directors & Officers Liability—D&O). This insurance plan covers risks of erroneous decisions or negligent actions of the heads of organizations that entailed losses from third parties. This product gains new significance with the introduction of Big Data technology, as the business model of this technology is based on providing direct interaction between a large number of users. An important byproduct here is a large amount of user data that is used as input for services, which entails the risk of incorrect decision-making.

Conclusion The study allows us to draw the following conclusions. The lack of trust in the institutional field primarily affects the financial sector (Fuchs, 2002). If trust cannot be ensured by the institutional policy of the state, this can be achieved by attracting those insurance companies that are actively involved in technological trends, although, given the existing technical capabilities of modern ecosystems, obtaining the necessary information for risk management can be limited. Nevertheless, prioritizing the interaction between the financial and credit organization and its customers has provided clear, easy-to-use and affordable products, the distribution of which—through online and mobile services—helps to create a key platform for personalized relationships (especially for “good borrowers”) and, as a result, the offer of personalized insurance services. Access to unstructured data increases the ability of a financial institution to assess risks for insurance and for understanding its client portfolio. The transition to digital interaction will significantly reduce the number of retail outlets, which contributes to the growth of cyber threats and involves interaction with FinTech, including the

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so-called RegTech and RiskTech, which assess the compliance with the established requirements of the financial institution’s risk management system.

References Azfar, O., & Cadwell, C. A. (Ed.). (2006). Market-augmenting government: The institutional foundations for prosperity. University of Michigan Press. Bogoviz, A. V., Osipov, V. S., & Semenova, E. I. (2018). Selection of the key spheres of modern Russian industry: Prioritizing. In E. Popkova (Ed.), The impact of information on modern humans. HOSMC 2017. Advances in intelligent systems and computing (Vol. 622). Springer. Bohn, J. R. (2018). Insurance in poverty reduction: A case from China. Available at: https://arb.ru/upload/files/siezd2018/20180403_ https://www.swissre. com/institute/research/topics-and-risk-dialogues/society-and-politics/insura nce-in-poverty-reduction-a-case-from-china.html. Accessed 7 January 2020. Borio, C., & Filosa, R. (1994, December). The changing borders of banking: Trends and implications (BIS Economic Papers, No. 43). Foster, J. E., Greer, J., & Thorbecke, E. (1984). A class of decomposable poverty indices. Econometrica, 52(3), 61–66. Friedman, M. A. (1957). Theory of consumption function. Princeton University Press. Frost, J., Gambacorta, L., Huang, Y., Shin, H. S., & Zbinden, P. (2019, April). BigTech and the changing structure of financial intermediation (BIS Working Papers, no. 779). Fuchs, M. (2002). Building trust: Developing the Russian financial sector. World Bank Group. http://documents.worldbank.org/curated/en/530171468777 935921/Building-trust-developing-the-Russian-financial-sector. Hornuf, L., Klus, M., Lohwasser, T., & Schwienbacher, A. (2018, July). How do banks interact with Fintechs? Forms of alliances and their impact on bank value? (CESifo Working Papers, no. 7170). Hosking, G. (2011), Trust: Money, markets and society. Seagull Books. Kasperskaya, N. (2018). Digital technologies: Threats of the financial and banking sphere and ways of solution. Association of Russian Banks. Kovacevic, R. M., & Semmler, W. (2020). Poverty traps and disaster insurance in a Bi-level decision framework. In V. M. Veliov, J. L. Haunschmied, R. Kovacevic, & W. Semmler (Eds.), Dynamic economic problems with

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regime switches: Dynamic modeling and econometrics in economics and finance. Springer. Lamarre, E., Levy, C., & Twining, J. (2010, February). Taking control of organizational risk culture (Working Papers on Risk, McKinsey, No. 16). Osipov, V. S., Skryl, T. V., Blinova, E. A., Zeldner, A. G., & Alexeev, A. N. (2017). Institutional analysis of public administration system. International Journal of Applied Business and Economic Research, 15 (15), 193–203. Panova, G. S. (2018). Megatrends of financial markets regulation and Russian banking. 5th International Multidisciplinary Scientific Conference on Social Sciences and Arts SGEM 2018. SGEM Florence Scientific Sessions (pp. 479– 489). Pechalova, M. Y. (2015). Bank risks: Identification and evaluation methods. Rome University. Peery, N. S. (1995). Business, government and society. managing competitiveness, ethics and social issues. Prentice Hall. Post, J. E., Frederick, W. C., Lawrence, A. T., & Weber, J. (1996). Business and society. Corporate strategy, public policy, ethics (8th ed.). McGraw-Hill Inc. Smith, A. (2016). Research on the nature and causes of the wealth of peoples. EXMO. Townsend, P. (1979). Poverty in the United Kingdom. University of California. Tsvetkova, L. I. (2019). Methodology of assessing risks to sustainable supply chain of an insurance company. Journal of Supply Chain Management, 8(3), 275–292. Available at: https://ojs.excelingtech.co.uk/index.php/IJSCM/art icle/view/3175. Accessed 19 January 2020. Voitsekhovich, A., & Adamchuk, N. (2017). Global cyber insurance market. Insurance Law, 4 (77), 31–36. Wolff, J. (2019). Poverty. Philosophy compass, 14 (12). Yakunina, A. V., & Popov, M. V. (2018). Digital finance and new risks for financial market participants. Available at https://cyberleninka.ru/article/n/digitalfinance-and-new-risksfor-financial-market-participants. Accessed 15 January 2020. Zeldner, A. (2019). The mechanism of public-private partnerships in attracting investment in agriculture. IOP Conference Series: Earth and Environmental Science, 274 (1). https://doi.org/10.1088/1755-1315/274/1/011001. Zubetc, A. N. (2001), Market researches of the insurance market. Center of Economy and Marketing.

Pension Funds and Prospects for Reforming the Russian Pension System as a Condition for the Qualitative Implementation of the State’s Social Policy Aleksei Bolonin

Introduction The pension system is a system of state and non-state financial institutions created to provide citizens with material support in the form of cash payments after meeting certain conditions for age, health, or family composition. Pension savings in Russia are the funds reflected in the individual personal account of the insured person with the Russian Pension Fund. Pension savings funds include the insurance contributions for the labour pension’s fund, transferred by the employer within the framework of compulsory pension insurance; for participants of the State Pension CoFinancing Program (the amount of additional insurance contributions paid by citizens for the funded part of the labour pension); the amount of contributions made by employers if they are a third party to the State A. Bolonin (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_16

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Pension Co-Financing Program; the amount of contributions transferred by the state to co-finance pension savings; the amount of funds (part of funds) of maternal (family) capital, aimed at creating the funded part of the labour pension; and income from investing these funds. Those who took part in the programme of state pension co-financing or sent maternity capital funds to form the funded part of the pension were given the right to receive funds from these programmes at their choice: either in the form of an urgent pension payment or as part of the funded share of old-age labour pension.

Methodology The Russian pension provision system is mainly associated with the State Pension Fund. Russian citizens born between 1967 and 31 December 2015 were allowed to choose: either to form only an insurance pension, or to form an insurance and funded pension at the same time. Those born in 1967 or later retain the choice of a pension option if, from 1 January 2014, employers first charged them with mandatory pension insurance contributions. The insurance pension will be increased by the state through annual indexation. As for the funded part of the pension, it is invested by a non-state pension fund or a management company of choice. Pension savings profitability depends on the results of their investment; that is, one can lose from their investment. In this case, only the amount of paid insurance premiums is guaranteed to be paid. Pension savings are not indexed. In 2016, regardless of the choice of the pension option in the MPI system, all citizens have pension rights only for an insurance pension based on the entire amount of accrued insurance premiums. Among the actual problems of the Russian pension system, the following can be distinguished (Krutikova, 2016). 1. The state guarantees the amount of paid contributions through the Deposit Insurance Agency, but without taking into account inflation (i.e. only in par). Therefore, it will be impossible to increase pension savings.

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2. The results of the funded system depend on the manager’s skills. If we take the experience of developed countries, 80–90% of investment efficiency depends on the assets in which the funds were invested. This is especially true in the context of the globalized financial markets, the overflow of capital from one sector to another, financial instability, economic sanctions, etc. In Russia, there is no system of financial institutions and large financial players that provide a stable income from long-term investments. Besides, it should be noted that both people and economic entities mistrust the ongoing reforms. 3. People are not financially literate and are not interested in the transition to a voluntary accumulative pension insurance system. 4. A protracted transition period puts distance between a joint generations’ responsibility system and individual personal accounts and, in this regard, preserving the steam principle of pension fund resources’ distribution. 5. The obvious and most significant problems of the Russian pension system include the pension fund’s budget deficit and incorrectly calculated pensions (Lebedeva, 2014). The pension fund’s deficit is a long-term problem, since the transition from the USSR’s pension system (in the form of joint responsibility across several generations) to the system of individual personal accounts in the pension fund (which took into account the accumulations of working citizens in the form of compulsory social contributions) affected that part of the population which has reached the retirement age but did not have an individual personal account with the pension fund.

Results The Russian pension reform is based on the idea of voluntary pension insurance. Mandatory pension insurance acts as a guarantee of the citizens’ rights to receive an old-age pension. In this case, voluntary insurance adds to the obligatory one. However, the state pension cannot provide the overwhelming majority of pensioners with acceptable and decent living standards. In fact, the state undertakes to provide only the

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minimum required pension, and the rest will depend on the opportunities and the desires of the person. In such a situation, either taxes or the retirement age must be raised (Chernykh, 2016). In Russia, in the current situation, the total contributions to the pension system are almost twice the size of lifetime pension payments, which characterizes the system as ineffective and is due to the low life expectancy of the retired (Zabolotsky, 2017). The ongoing Russian reform aimed at creating a self-sufficient insurance system has not solved the existing problems, and the funded pension system has not been proved effective (Popov, 2013). To solve this problem and improve the pension system, its funded part should be transformed into a voluntary funded programme (Startseva et al., 2019). There are two main pension systems: pay-as-you-go, and the funded one. A purely funded pension system is used in Chile, El Salvador, Bolivia, Mexico, and Kazakhstan. In most developed countries, pension systems are a combination of pay-as-you-go and funded systems, i.e. a mixed pension system (Zabolotsky, 2017). In such systems, their first level is a mechanism for protecting people against poverty. This is the state pension, which is built on the pay-as-you-go principle. At the same time, a basic pension is guaranteed, the amount of which does not depend on the participant’s contribution to the system. It is financed by budgetary contributions or by contributions from the working population (Zabolotsky, 2017). The second level is compulsory pension insurance, which is built on the principles of the pay-as-you-go and funded system. When determining the pension amount, the participant’s contribution to the system is taken into account; this serves as a safety mechanism and is a supplement to the basic pension, which is funded by contributions from the working population. In this case, rebates can go both to the pay-asyou-go system for current pensioners’ payments and to the individual accounts of insured persons depending on the specific regulatory regime. The third level involves a personal, or additional, pension, which is built on the principles of a funded system. The amount of the additional pension depends solely on the funds accumulated by the insured person

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on an individual personal account; in most countries, it is a private initiative and serves as a tool to ensure a decent standard of living. At this level, funds are invested by financial institutions (Zabolotsky, 2017). Both pay-as-you-go and funded systems have advantages and disadvantages. The goal of a distributive pension system is to protect against poverty, but at the same time it is not adapted to demographic changes; the cumulative pension system is aimed at achieving economic efficiency, which is typical of market economies. However, a cumulative pension system cannot be implemented all at once, and it is highly sensitive to financial market changes. In recent decades, many countries have carried out the reform of national pension systems and started to use the system of voluntary accumulative pension programmes (plans). The main reason for such reforms is to increase life expectancy. According to Eurostat Social Protection Database, by 2030, average life expectancy in the Netherlands and Luxembourg is expected to reach 81.6, in Austria it will be up to 81, in Denmark 80.8, in Belgium 80.5, in Estonia 75.7, in Lithuania 73.6, in Romania 75.5, and in Bulgaria 75.3. As a result of the growing life expectancy, there is a projected shortage of funds for pension payments, which also grow over time. The components of the main EU pension policy priority areas include, firstly, an increase in the duration of employment—which is achieved by increasing the retirement age, stimulating employment after reaching retirement age, and reducing the share of early retirement benefits—and, secondly, increasing the share of savings—which is achieved by increasing the amount of savings on compulsory pension insurance and additional pension provision. For example, in Italy, the Czech Republic, and France, the means of prolonging working life is an increased minimum work experience, the Portuguese are stimulated to save up as the amount of their savings defines the established pension, and other EU countries have increased the retirement age. The maximum increase in the retirement age by 2060 is predicted in the Czech Republic (up to 69.3 years old), Slovakia (up to 67.8 years old), and Denmark (up to 72.5 years old). There is no such increase in Luxembourg, Finland, and Sweden. In the EU, there is

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a tendency to equalize the retirement age for men and women. A twoyear gender differentiation is predicted only in Bulgaria and Romania. The governments of Denmark, Italy, Greece, and Hungary are going to launch a mechanism for linking the retirement age to the projected life expectancy, which will reduce the financial burden on the pension system (Zabolotsky, 2017). The national pension system reforms implemented in many countries are aimed at reducing the state role in the first pay-as-you-go level and at transferring the management of the poverty risk upon reaching retirement age to the third, individual level (Shmigol, 2016). Individual pension savings are formed by transferring part of the salary (either independently by the employee or by his or her employer) to individual pension accounts opened, in addition to private pension funds, in various financial institutions: banks, credit unions, mutual funds, trust companies, etc. Among the voluntary funded pension plans, one can distinguish corporate plans that are related to the employment relationship between the employer and the employee and which are accepted and controlled by the employer, and individual plans not related to the employment relationship with the employer, which are adopted and controlled by an authorized financial institution. At the same time, the problem of motivating people to participate in the funded component of the pension system arises clearly. Applied incentive instruments can be divided into general (typical for most countries) and individual (related to the national characteristics of a particular country’s financial institutions). Common factors include the model of the state’s economic policy (liberal, conservative, social-democratic and their combinations), the model of the current social policy (Anglo-Saxon, Scandinavian, European), the initial conditions for the pension system formation and pension reforms, and historical and cultural traditions (Shmigol, 2016). It is obvious that these factors affect the forms of the voluntarily funded pension system’s components. For example, individual pension insurance is actively developing in the USA, Canada, Great Britain, and Switzerland, which can be explained by high salaries and the significant wage gap. In countries with a moderate and evenly distributed wages (Sweden, the Netherlands, Poland), corporate pension

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insurance is used to a greater extent as an addition to the compulsory state pension insurance system. With low wages at the time of the pension reform, administrative levers are actively used to change for the new forms of pension provision based on a strict regulatory model, which was typical for Singapore and Latin America, where employers were required to ensure the corporate pension programme (quasi-voluntary pension plans). Germany, Belgium, USA, UK, Canada, and France are the leaders among the countries where employees are actively involved in the employer’s voluntary professional pension plans. Among the countries actively using voluntary individual pension plans in the pension system, one can single out New Zealand, the Czech Republic, Sweden, Germany, and Canada (Shmigol, 2016). Today’s Russia is similar to Latin American countries in terms of the working-age population with low income. In this regard, when implementing reforms in Russia, it is advisable to consider the negative consequences of a non-state funded pension system in Latin America. These include a reduced coverage of the working-age population with additional pension programmes, violated payment deadlines and increased arrears in contributions to the non-state pension system, weak diversification of the investment portfolio, gender discrimination in the private pension system, and a monopoly on the pension savings management market (which led to high administrative costs in private retirement plans, which sometimes exceeded the investment income earned). At the same time, both in Latin America and in Russia, there is a threat of an increasing proportion of the elderly population not covered by pension provision either at all (if the state pension system is abolished), or in terms of funded pension provision (Shmigol, 2016). Experts draw attention to the fact that the principle of private-funded pension programmes’ equivalence, which implies increased pension payments with an increased amount of contributions, also did not have the expected effect on an increase in the accumulated funds of the non-state pension system in Latin American countries (Clark et al., 2009).

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The experience of foreign countries also shows that, in order to compensate for the increasing burden of contributions to private quasivoluntary pension programmes, tax benefits in the form of tax deductions have proven to be the best voluntary pension savings systems in terms of determining the tax base and tax credits.

Conclusions Increased maintenance costs, dependence on budget receipts and contributions, low assets, and an expected increase in the budget deficit of the Russian Pension Fund dictate the need to transform the Russian pension system. The pension system reforms carried out by introducing corporate pension programmes with automatically registered company employees will reduce labour migration within the industry, mobilize financial resources that can be invested in the economy, and increase people’s responsibility for their future by redistributing the risk of poverty when reaching retirement age. At the same time, pensions can be increased in absolute terms by increasing the contributions’ share to the funded part of the pension. An effective stimulus that will make people take part in voluntary pension programmes is tax incentives, when the state can reduce the income tax rate (the personal income tax, if we speak about Russia), provided that the taxpayer participates in such programmes, as well as state subsidies for the initial and subsequent contributions. National Welfare Fund can become the source of subsidies. The development of voluntary and quasi-voluntary pension programmes should be carried out openly. We should discuss their advantages and disadvantages, which will allow participants and financial consultants to help people in pension planning, choosing a pension plan, and assessing investment risk. The transition to corporate pension programmes should begin in test mode in the form of several pilot projects in some sectors of the economy distinguished by contributions from employees and employers,

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state co-financing, schemes of pension savings that will allow one to identify each project’s advantages and disadvantages and work out the best quasitopological corporate security option.

References Chernykh, A. A. (2016). Features of pension reform in Russia. Business Education in the Knowledge Economy, 1, 72–76. Clark, G. L., Munnell, A. H., & Orszag, J. M. (Eds.). (2009). Oxford handbook of pensions and retirement income. Oxford University Press. Eurostat. (n.d.). Social protection database. Available at: https://ec.europa.eu/eur ostat/web/social-protection/data/database. Krutikova, V. V. (2016). Pension accumulations in Russia: Myths, reality and alternatives. Social-Economic Phenomena and Processes, 11(5), 32–37. Lebedeva, L. F. (2014). Federal program of pension provision in the USA. Russia and America in the 21st Century, 2, 77–81. Pensionnyj fond Rossijskoj Federatsii grazhdanam [Pension fund of the Russian Federation to citizens]. https://www.pfrf.ru/grazdanam/pensions/pens_nak/ chto_nuzh_pens_nak/. Popov, A. A. (2013). The American pension system in a crisis and comparison with Russia. USA and Canada: Economics, Politics, Culture, 11(479), 15–32. Shmigol, N. S. (2016). Foreign experience of stimulating people’s participation in voluntary funded pension systems and prospects of its application in Russia. Economy. Taxes. Right., 6 . Startseva, S. V., & Vorobyeva, K. A. (2016). Consolidation of the right to social security in the Constitution of the Russian Federation. Aspirant, No, 3(19), 85–86. Startseva, S. V., Starodubova, V. S., & Timokhina, M. I. (2019). Comparative characteristics of the pension system of Russia and the USA. International Journal of Humanities and Natural Sciences, 12(2). Zabolotsky, E. D. (2017), Experience of reforming pension systems of countries in the European Union and opportunities for its use in Russia. Bulletin of St. Petersburg State University. Economy., 33(3), 472–497.

Microfinance Organizations in Russia and Abroad Ksenia Trushina and Olesya Gracheva

Introduction Despite the small share of both Russian and foreign financial markets, microfinance organizations play an important role in developing the economy and making financial services more available for the most economically vulnerable business entities. In Russia, in accordance with Federal Law No. 151-FZ dated 02.07.2010 “On Microfinance Activities and Microfinance Organizations”, a microfinance organization is understood as a legal entity that carries out microfinance activities (i.e. providing microloans or microfinance), and information about it is included in the state register of microfinance organizations. Microfinance organizations can operate in the form of a microfinance company or a microcredit company (Federal Law No. 151-FZ, 02.07.2010). Microloans can be considered K. Trushina (B) · O. Gracheva Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_17

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as analogues to loans since they are also issued on terms of urgency, payment, and repayment, but, as a rule, for small amounts and a short period (Tsvetkov et al., 2019). Initially, microfinance was the name for services related to smallvolume loans (microloans) to individuals for whom access to traditional bank lending is limited for one reason or another (remote settlement, lack of credit history or bad credit history, an insignificant amount with an insignificant term, etc.). Also, microfinance organizations can provide services related to saving money, insurance, leasing, money transfers, and payments. It is well known that microfinance was first introduced in developing countries such as India, Bangladesh, and Brazil at the end of the twentieth century. One of the first microloans for starting a business was issued in Bangladesh by the Nobel Peace Prize winner and banker Mohammed Yunus. Initially, microfinance was popular only in rather poor countries, and then microfinance organizations appeared all over the world (Lenderwood et al., 2013). The work of Russian microfinance organizations can be assessed in two ways: on the one hand, they provide loans to those clients who cannot get them in other sectors of the financial market, and they are widely and easily accessible; but, on the other hand, the loans provided are offered at very high interest rates, the borrower’s creditworthiness is assessed poorly or not at all, and, when collecting debts, microfinance organizations do not always use legal methods (Shaker, 2019).

Methodology The research is based on the study, systematization, generalization, and analysis of official documents and economic literature, done so via using a systematic approach and statistical methods. Official documents included Russian legislative and regulatory acts regulating microfinance organizations in the territory of the Russian Federation, as well as in some other countries. Analytical and statistical data of the Bank of Russia and other open sources were analysed.

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Results Until the Federal Law “On Microfinance Activities and Microfinance Organizations” entered into force in 2011, the development of microfinance in Russia can be seen as chaotic. In the period from 2004 to 2010, the number of microfinance service clients increased more than 5 times (the number of borrowers exceeded 100 million people), and the number of small businesses serviced amounted to about 400 thousand people. At the same time, microfinance organizations were presented in different forms, the main of which was credit consumer cooperatives (Tsvetkov et al., 2019). After the legislative regulation was introduced, the following types of microfinance organizations began to be distinguished (depending on the activity scale and the amount of capital): microfinance companies (MFC) and microcredit companies (MCC). Legal amendments first divided microfinance organizations into microfinance companies and microcredit companies in 2015. Microfinance companies are those that have funds of at least 70 million roubles. They can perform the entire range of operations permitted for microfinance organizations: issuing bonds, or attracting funds from citizens (in the amount of 1.5 million roubles) and legal entities (issuing microloans for up to 1 million roubles per borrower). Microcredit companies include those with a capital of fewer than 70 million roubles. They cannot attract and invest funds obtained from the population, and such companies can provide microloans only at the expense of their funds and the funds of their owners. The bill reduces the limit for issuing microloans to 500 thousand roubles (instead of 1 million roubles established earlier). Under current legislation, MFOs have several restrictions in Russia, namely: 1. microfinance organizations cannot issue loans in foreign currency; 2. a microloan to an individual cannot exceed the principal amount of one million roubles; 3. microfinance organizations cannot change (increase) the rates and commission fees on loans unilaterally;

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4. microfinance organizations cannot apply penalties to borrowers for full or partial early loan repayment, provided that the MFI received notification of this no later than 10 days before the repayment date; 5. microfinance organizations cannot carry out any types of professional activities in the securities market; 6. microfinance organizations cannot issue microloans to a borrower (defined as a legal entity or an individual entrepreneur), if the main borrower owes to this microfinance organization more than 5 million roubles under contracts, if such a microloan is provided. In Russia, microfinance organizations mainly provide microloans to ordinary people, individual entrepreneurs, and legal entities (small- and medium-sized businesses). The main body that regulates the work of Russian microfinance organizations is the Central Bank of the Russian Federation. Following its requirements, microfinance organizations are to have the status of a legal entity, make reports under the regulator’s requirements, and also comply with its standards. The Bank of Russia also maintains the official state register of Russian microfinance organizations and analyses their work. According to the Bank of Russia, as of January 2020, about 1,750 MFOs are operating in Russia. Considering the growing number of Russian MFOs, we can say that since 2015 their number has been decreasing. At the beginning of 2012, there were 998 MFOs in the register, and by the beginning of 2015 there were already 4153 such organizations. At the same time, 1000–1500 of these are annually included and excluded from the register. The growing number of MFOs in 2015 compared to 2012 can most likely be explained by the fact that many companies have emerged from the shadows, rather than by the rapid creation of new MFOs. We can explain the decreasing number of MFOs by the fact that the Bank of Russia is supervising MFOs more attentively, thus unscrupulous companies have been withdrawn from the market. As of January 2020, the following main groups of MFOs can be distinguished in Russia:

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1. large MFOs with a wide sales network throughout the country, consisting of their own and agency sales offices, as well as pursuing an aggressive advertising policy through the media and the Internet. Such MFIs often attract financing by issuing bonds, obtaining Bank loans, or attracting loans from the public; 2. regional MFOs that have one or more sales offices in small towns or urban-type settlements exclusively within one region, where there is a stable demand from the population for obtaining microloans. Such MFOs take advantage over the features of the regional economic development, taking into account the standard of living there. Typically, these MFOs are well-recognized in their region; 3. specialized MFOs, that, as a rule, specialize in a certain type of lending: for example, a loan secured by real estate or a car, tender loans, etc.; 4. MFOs affiliated with banks or large companies that have access to a wide range of potential borrowers: for example, housing and communal services, industrial enterprises, public associations or unions, including SROs; 5. MFOs created for lending to small- and medium-sized businesses in the region. Such MFOs are created by local authorities (a municipal formation or constituent entity of the Russian Federation) in the form of non-profit organizations and take part in various regional and federal programmes to support small- and medium-sized businesses; 6. “empty” MFOs that were specially created for sale or stopped performing microfinance activities as they failed to achieve the planned result; 7. Internet MFOs operating only on the Internet and issuing online microloans to clients without visiting their office. Online MFOs already have a significant market share (over 30%) and continue to actively develop. Besides, since October 1, 2019, the work of online MFOs has been legalized by introducing appropriate amendments to the legislative framework. (Federal Law No. 151-FZ, 02.07.2010). The regional aspect of MFOs is also of interest: although the bulk (about 60%) of banking, insurance, and several other financial market

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sectors are located in Moscow, the Moscow Region, and St. Petersburg, the share of MFOs working there is only 22%. Clients of microfinance organizations are mainly individuals (82%), individual entrepreneurs (9.5%), and legal entities (small- and mediumsized businesses) (8.5%). The microfinance sector is characterized by an increased share of overdue debt. Thus, the share of outstanding debt, for which the payment of the principal and interest was overdue by 90 days or more, made 28.7% for microfinance organizations at the end of September 2019 and had an upward trend. The return on equity of Russian microfinance organizations is quite high, but it tends to decline, which is the result of the new legislative requirements limiting microloans’ interest rates. The return on equity in the industry as a whole as of September 30, 2019 was 14.4%. Despite the rather high indicator, there is a tendency to lower profitability, since in March 2019 this indicator was 18.5%. The profitability of IFRS in Russia is in line with the global average for countries where microfinance mostly meets consumer needs. In advanced economies, where MFOs mainly finance SMEs, the sector’s ROE is lower, at 6–7%. One of the most important trends in the development of Russian MFOs is the active involvement of online channels into microcrediting. In such an important segment as PDL loans (payday loans), about 60 MFOs currently issue more PDL loans through online channels than the remaining MFOs, which have only an offline disbursement channel. This trend has both positive and negative sides: on the one hand, the number of PDL-issuing units (more than two thousand units in six months) in crowded places is decreasing, which will decrease in the number of spontaneously made decisions; searching for and obtaining a loan on the Internet requires minimal qualifications, technical devices, and a clear understanding of the need for the borrowed funds. On the other hand, one can also note the availability of online loans and more room for fraud. In Russia, both society and the state pay special attention to smalland medium-sized businesses. State policy plays a special role in stimulating small businesses, which includes dealing with a system of financial

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support for small businesses. It should be noted that the most common form of financial support for small businesses is a bank loan (including the sort with a guarantee of special funds and the funds supporting the development of small- and medium-sized businesses). If a small business cannot use this form of financial support—for example, at the start-up stage, due to the lack of credit history—then it is advisable to lease expensive equipment. Besides, small businesses often need short-term funding, subject to quick financial support. In this case, it is advisable to use a loan from a microfinance organization. The advantages of this form of financial support are quick decision-making and prompt funds’ disbursement upon approval. Today this financial product is quite expensive (high interest rate), and a small loan amount also makes a significant drawback. Besides, it should be noted that microfinance organizations issue funds for a short period. These factors significantly reduce the number of microloans issued to small businesses, since most small businesses need long-term loans to buy expensive equipment. However, it must not be forgotten that in such areas as trade, medicine, or consulting services, a small business sometimes needs small short-term loans to purchase materials and components. When referring to microloans issued to small businesses, it is advisable to consider how many such agreements were concluded during the study period. Table 1 provides information on the number of microloan agreements. Table 1 shows that the number of microloan agreements with smalland medium-sized Russian businesses for the period under review is very low—about 0.1% of microloan agreements were concluded with smalland medium-sized businesses. It is nevertheless worth noting that the number of microloans issued during the reporting period is growing every year. Regarding microloans to small- and medium-sized businesses, as of September 30, 2017, a tenth of the total amount issued under microloan agreements falls on small- and medium-sized businesses. Over the next two years, a growing number of microloans can be seen, both in general and for small- and medium-sized businesses. It should be noted that

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Microloan agreements concluded in 2017–2019

Index Number of microloan agreements concluded during the reporting period, including the structure of concluded microloan agreements: (units) With SME companies Total The ratio of microloan agreements with SMEs to the total number of agreements concluded Amount of microloans issued during the reporting period, including the structure of microloans issued by MFOs: (million roubles) SP SME LE SME Total

30.09.2017

30.09.2018

30.09.2019

26,804 16,683,647 0.16%

21,759 21,245,181 0.1%

23,321 24,938,852 0.09%

8,238.9 7,663.7 11,797.1 10,763.1 179,732.2

8,947.0 8,739.7 12,420.1 12,203.8 237,204.8

13,469.8 12,816.5 16,089.9 15,346.5 299,374.8

Source Compiled by the authors based on www.cbr.ru

with such a trend, the proportion of funds issued to small- and mediumsized businesses to the total amount of funds issued decreases: 8.8% as of September 30, 2018, and 9.4% as of September 30, 2019. Table 1 shows that the largest growth in the amounts of microloans issued to small- and medium-sized businesses was observed for the period 2018–2019 (approximately 50%). It is important to consider not only the Russian experience of issuing microloans to small- and medium-sized businesses, but also the international one. However, it may be fallacious to compare these indicators, since there are different criteria for classifying companies as smalland medium-sized businesses. These criteria for Russia are presented in Table 2. For example, in the USA, an enterprise is classified as a small business in retail trade, provided that its average annual income for the last three financial years did not exceed $5 million, with about 11 types of activities being exceptions to the rule. US law does not contain criteria

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Table 2 Categories of small- and medium-sized businesses in Russia and the USA Russia Category of smalland medium-sized businesses

Revenue

USA Year-end average staff

Microenterprise

up to 120 million roubles

up to 15

Small business

up to 800 million roubles

up to 100

Medium business

up to 2 billion roubles

from 101 to 250

Revenue no more than 2 million euros no more than 10 million euros no more than 50 million euros

Year-end average staff up to 10

up to 50

from 51 to 250

Source Compiled by the authors

for classifying a business as a medium one. Legal acts operate exclusively within the concept of “small business". In terms of structure, the closest to Russia is the EU’s gradation of the SME segment adopted, but it is rather difficult to compare Russian and foreign experience.

Conclusions/Recommendations The article has briefly discussed the history of Russian microfinance organizations, has studied and summarized the main regulatory and legislative documents in this area, and has also carried out a comparative analysis with foreign microfinance organizations. The available official statistic data has been analysed. The Russian microfinance market is facing the following trends:

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– a reduced number of MFOs of a higher quality; – MFOs are reoriented from lending to small- and medium-sized businesses to individuals, mainly in the online segment and for consumer purposes; – lower MFO profitability due to the new requirements of the Bank of Russia; – significantly growing and concentrating MFOs issuing loans through online channels; – stronger negative tendencies in the work of MFOs, namely: constantly growing overdue debts, collecting debts using illegal methods, the debt load. After comparing Russian MFOs with foreign ones, we concluded that Russia has some specific features, such as high profitability or a high individual share in the portfolio of consumer loans. Microfinance does not play a significant social role in Russia, as it happens in many developing countries: the high debt load of the poorest population segments, financial illiteracy, and using MFOs for the consumer rather than production purposes do not allow the poorest people, who are usually MFO clients, to improve their well-being. Despite the measures already taken by the Bank of Russia, which undoubtedly have brought positive results, it is worth further focusing efforts on the more effectively using microfinance organizations’ proportional regulation.

References Lenderwood, J., Earne, J., & Nelson, C. (2013). The new microfinance handbook: International bank for reconstruction and development. Washington, DC: The World Bank. Available at: https://openknowledge.worldbank.org/ bitstream/handle/10986/12272/9780821389270.pdf. Accessed 16 January 2020. Shaker, N. S. (2019). Risk of intermediary activity of microfinance organizations. Finance Money Investment, 2, 20–27.

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Tsvetkov, V. A., Dudin, M. N., & Saifieva, S. N. (2019). Problems and prospects of development of microfinance organizations in the Russian Federation. Finance: Theory and Practice, 23(3), 96–111. Zaitsev, V. B., & Ternovoy, S. M. (2018). Prospects for the development of proportional regulation in microfinance organizations. Banking Service, 6, 2–6.

Federal Laws Federal Law No. 151-FZ of 02.07.2010 “On microfinance activities and microfinance organizations” (current version, 2020). Available at: https://www.consultant.ru/document/cons_doc_LAW_102112/b81 9c620a8c698de35861ad4c9d9696ee0c3ee7a/. Federal Law No. 353-FZ of 21.12.2013 “On consumer credit (loan)” (current version, 2020). Available at: https://www.consultant.ru/document/ cons_doc_LAW_155986/. Federal Law of 24.07.2007 N 209-FZ (ed. FZ of 23.06.2016 No. 222-FZ) “On the development of small and medium-sized businesses in the Russian Federation”. Resolution of the Government of the Russian Federation No. 265 of 04.04.2016 “On the maximum values of income received from business activities for each category of small and medium-sized businesses”.

Sustainability Trend in Russian Banking Sector Amin Babazade

Introduction Today, the concept of sustainable development is becoming a new paradigm of modern socio-economic relations, involving more and more agents of economic activity. By performing the most important function of financial intermediation, banks have a significant impact on society and, accordingly, on “sustainable development” (Miralles-Quirós et al., 2018). Sustainable development, in turn, is defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Geissdoerfer et al., 2017). Starting in the late 1970s and early 1980s, banks, like large corporations, followed the advice of Milton Friedman, a Nobel prize-winning economist: “social responsibility of business implies increasing profit” A. Babazade (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_18

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(Friedman, 1970). In fact, Friedman’s doctrine recognized the responsibility of business only to shareholders. The situation changed due to the economic crisis of 2008–2009, which began with the banking crisis. The crisis has shown that banks do not affect only the shareholders’ interests. As a result, banks have begun to focus on corporate social responsibility in order to regain public trust (Miralles-Quirós et al., 2019). Historically, there have been three main approaches to determining an organization’s contribution to sustainable development. The first approach, which was described above, states that the only task of the company is to maximize the shareholder profit. The second approach encourages organizations to consider environmental, social and governance aspects in their operations, regardless of the associated costs and benefits (Post et al., 2002). The third approach combines, to some extent, the first and second ones stating that organizations should strive to maximize shareholder profit, but at the same time, whenever possible, take environmental, social and governance aspects into account when making decisions (Porter & Kramer, 2011). Therefore, when contributing to sustainable development, economic efficiency and profitability must be accounted for. A survey study of 132 scientific publications in reputable international journals shows that 78% of scientific articles state a positive correlation between business sustainability and financial performance (Alshehhi et al., 2018). According to research, sustainable banking contributes to improved bank profitability indicators (Esteban-Sanchez et al., 2017; Forcadell & Aracil, 2017; Miralles-Quirós et al., 2018; Shen et al., 2016; Wu & Shen, 2013). corporate social responsibility and a company’s contribution to sustainable development rather positively affect its financial results. In other words, social responsibility creates a shared value for both the company and society (Porter & Kramer, 2011).

Definition of “Sustainable Banking” As noted above, banks, being important players in the economy, also share the new sustainable development paradigm. For example, in 2018, 26% ($ 12 trillion) of all US assets held in trust were sustainable responsible investments (Méndez-Suárez et al., 2020). There are several

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approaches to defining a sustainable (green, ethical, socially responsible) bank. In this article the concepts of sustainable bank, green bank, socially responsible bank, an ethical bank, etc are equivalent and have the same semantic and conceptual meaning. The first approach to defining a sustainable bank is as a bank that makes socially responsible investments, i.e. investments that take into account not only economic criteria (such as profitability and risk) but also environmental, social and management aspects, which are known as ESG-factors (environmental, social, governance) (del Carmen Valls Martínez et al., 2020). The second approach to the determining the concept is that the bank recognizes corporate social responsibility (Nosratabadi et al., 2020): this approach means that the bank recognizes its responsibility not only to shareholders but also to other stakeholders (customers, bank employees, partners, society). The third approach is when a sustainable bank takes action to reduce its “harmful” environmental impact, reduce carbon emissions and mitigate climate change (Weber, 2012). Finally, the fourth approach to defining a sustainable bank assumes that banks offer products that contribute to sustainable development (Nosratabadi et al., 2020): for example, banks can help to achieve 6 of 17 UN Sustainable Development Goals: eradicate poverty, eliminate hunger, improve health and well-being, education, achieve gender equality, provide clean water and improve infrastructure (Nosratabadi et al., 2020; Nwagwu, 2020).

Research Problem According to Shershneva & Kondyukova (2020), of the BRICS countries, Russia occupies the last position in terms of implementing the “principles of sustainable development” in the banking sector. The same study notes that large Russian banks are taking certain steps to implement the principles of responsible financing. However, there is still a misunderstanding of this area’s importance. According to the Bank of Russia—set out in the Concept for the Organization of a Methodological System for the Development of Green Financial Instruments and Responsible Investment Projects in Russia—Russia does not have a consolidated position of the state, methodology and institutions for

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assessing the risks of ESG investments and representing Russian interests in this area at the global level (Central Bank of Russia, 2019). At the same time, Russia is taking the first promising steps towards responsible investment and green finance. In 2019, the Moscow Exchange, Russia’s largest exchange holding, created a “sustainable development” sector to finance socially significant and environmental projects (Moscow Exchange, 2019), one of the largest Russian asset management companies, Alfa Capital, launched a new ESG product, Alfa Green Investments, (Alfa Capital, 2019), Sberbank Private Banking, another major management company, launched the SPB Women Impact EUROPE Index investment strategy, which deals with investments in companies with a high gender balance (gender equality) (Sberbank Private Banking, 2019). Russia is accumulating experience in implementing the “sustainable development” concept in the financial sector. Today, there is a need to analyse the market development trend and systematize it. As noted above, Russia does not yet have a systematic approach and methodology for assessing the compliance of financial institutions with ESG principles and standards. This article examines the trends and quality of responsible financing in the Russian banking sector in order to determine the degree and nature of the Russian banks’ involvement in the implementation of the sustainable development concept.

Methodology To analyse the degree and nature of the Russian banks’ involvement in sustainable development programmes, the Sustainable Banking Performance Framework (SBPF) proposed by Kumar and Prakash (2018) was used. This analytical framework has been developed, supplemented and reproduced many times in different countries. As a result, it was adapted for developing countries as well (Amacanin, 2005; Jeucken, 2001; Kumar & Prakash, 2018; Papastergiou & Blanas, 2011; Scholtens, 2009). The reasons why this analytical framework was chosen as the main method of analysis are as follows: firstly, it was developed specifically for the banking sector; secondly, it was adapted for developing countries; and, thirdly,

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it was tested in the Indian banking sector, which, according to Shershneva and Kondyukova (2020), is close in terms of “sustainability” to the Russian one, out of the BRICS countries. At the same time, this methodology (SBPF) has not previously been used for analysing Russian banks.

SBPF (Sustainable Banking Performance Framework) Analytical Framework SBPF analytical framework evaluates the environmental and social aspects of banks’ activities to determine their sustainability level. It includes 40 indicators, which are grouped into 5 categories: (1) sustainable banking products and services, (2) indicators of the environmental management system, (3) social development indicators, (4) internal socio-ethical indicators, and (5) indicators of compliance with international principles of sustainable development and reporting. The first group of indicators characterizes the bank’s financial and credit offers that contribute to sustainable development (loans for environmental purposes, so-called green mortgage loans, socially responsible investments, “green” bonds). The second group of indicators reflects the bank’s commitment to transition to an environmentally friendly management system (using environmentally friendly technologies, accounting for environmental risks). The third group of indicators reflects the way banks contribute to social development (charity, increased financial literacy, special conditions for accessing banking services for disabled people). The fourth group of indicators assesses the social and ethical standards within the bank (gender balance, respect for human rights, work ethics). Finally, the fifth group of indicators reflects the adherence of banks to international rules of sustainable development and information disclosure (membership in GRI and in the Dow Jones Sustainability Index) (Appendix). Each of the five groups is assigned 20 points. At the same time, if the bank implements full practice on sustainable development for all 40 indicators, then it is assigned 100 points. To improve the accuracy of the study, each group of indicators is assigned a weight. For example, in the

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Sustainable banking practice implementation

Levels of sustainable banking practice implementation First level

Points 0–5

Second level Third level

6–10 11–15

Fourth level

16–20

Description Low level of implementing SB practice Initial steps to implement SB Active SB practice implementation SB practice is one of the main aspects of business

Source Compiled by the author based on Kumar and Prakash (2018)

case of the Russian banking sector, the situation is as follows: the group of indicators “sustainable banking products and services” is assigned 40%; the group of social development indicators received 20%; the group of “indicators of compliance with international sustainable development and reporting principles” received 20%; the group “internal socio-ethical indicators” received 10%; and the group of “indicators of the environmental management system” received 10%. The weights are established based on the priorities of the Concept for the Organization of a Methodological System for the Development of Green Financial Instruments and Responsible Investment Projects in Russia (Central Bank of Russia, 2019). Table 1 provides an assessment of the extent to which banks have adopted sustainable banking (SB) practices.

Sample, Data Collection and Analysis. The SBPF analytical framework was applied to a sample of 7 of the largest Russian banks: Sberbank, VTB, Gazprombank, Alfa-Bank, Moscow Credit Bank, UniCredit Bank and Raiffeisen Bank. To ensure that the established sample is representative, there are 3 banks with a significant share of state ownership (Sberbank, VTB, Gazprombank); 2 private Russian banks (Alfa-Bank, Moscow Credit Bank) and 2 foreign banks (UniCredit Bank and Raiffeisen Bank). The banks were selected from the list of the largest banks by asset value: Sberbank, VTB, and Gazprombank are the largest state-owned banks; Alfa-Bank and Moscow

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Credit Bank are the largest private banks; UniCredit Bank and Raiffeisen Bank are the largest subsidiaries of foreign banks (Statista, 2020). According to a study by Korzeb and Samaniego-Medina (2019), banks with national capital are more likely to use sustainable development opportunities than foreign ones. The method we used in the study is content analysis. This method has been repeatedly used in similar studies and has demonstrated high reliability and validity (Kumar & Prakash, 2018; Weber et al., 2014). Due to the lack of uniform reporting standards, data are collected from annual reports, sustainability reports, corporate social reporting reports, press releases and official websites of the above-named banks (Ngwakwe, 2012; Weber et al., 2014). Content analysis is applied to the collected data based on the “keywords” of the SBPF’s analytical framework (Appendix), which is then used to quantify the collected data.

Results The content analysis of data collected from annual reports, sustainability reports, corporate social reporting reports, press releases and official websites is shown in Table 2. The data are given for 5 main categories of sustainability, which together make up the overall indicator of the bank’s sustainability. Table 2 Bank sustainability indicators (in points) Bank Sberbank VTB Gazprombank Alfa-Bank Moscow credit bank UniCredit Bank Raiffeisen Bank

1st group

2nd group

3rd group

4th group

5th group

Resilience indicator

4 5 2 4 3

1 1,5 1 1 2

3 3 3 3 3

1 1,5 1 1 2

2 3 2 2 3

11 14 9 11 13

2 2

1 1

3 2

1 1

2 1

9 7

Source Compiled by the author

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For example, VTB’s overall sustainability indicator is 14, while the bank’s indicator for the third category (social development indicators) is 3. The degree to which Russian banks have adopted sustainable banking practices by 5 categories of indicators (1—sustainable banking products and services, 2—environmental management system indicators, 3—social development indicators, 4—internal socio-ethical indicators, 5—indicators of compliance with international of sustainable development and reporting principles) is shown in Fig. 1. The blue bar shows the aggregate indicator of these Russian banks’ involvement in sustainable development in 5 main groups. According to Fig. 1, Russian banks demonstrate the greatest involvement in sustainable development in terms of social development (increasing the financial literacy, organizing charitable, social and cultural events, facilitating access to banking services). At the same time, the minimum involvement of Russian banks is observed in providing sustainable banking products (loans in the field of ecology, “green” mortgages, socially responsible investments, “green” bonds).

1

2

3

4

5

Fig. 1 Degree of sustainable banking practice by Russian banks by 5 categories of indicators (Source Compiled by the author)

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Discussion and Conclusion The study is aimed at determining the degree and nature of Russian banks’ involvement in sustainable development programmes. According to the results, the degree of Russian banks’ involvement in sustainable development is defined as follows: large Russian banks are either actively introducing sustainable banking practices, or are taking initial steps in this direction. At the same time, there is not a single large bank, which has turned sustainable banking into one of the main areas of its business. The analysis also showed that Russian banks can ensure the sustainability of their business by dealing with social projects, for example, increasing financial literacy. At the same time, Russian banks show minimal interest in offering “sustainable” banking products, (for example, “green” bonds), although the first steps are being taken in this direction. Moreover, Russian banks are more actively implementing sustainable banking practices, while subsidiaries of foreign banks are lagging. This conclusion is consistent with that of Korzeb and Samaniego-Medina (2019). Therefore, within the Russian banking sector, the first steps are being taken to introduce the practice of sustainable development, but these steps are not comprehensive nor significant. This conclusion is consistent with the conclusion made by Shershneva and Kondyukova (2020). Speaking about the definition of sustainable banking in the Russian context, it is more in line with the second approach: the bank recognizes corporate social responsibility (Nosratabadi et al., 2020). Regarding the Russian banks’ attitude towards sustainable development, it is as follows: the company should strive to maximize shareholder profit, but at the same time, whenever possible, take environmental, social and managerial aspects into account when making decisions (Porter & Kramer, 2011). In addition, studies show that business sustainability contributes to the improving financial results (Alshehhi et al., 2018) and, in particular, sustainable banking contributes to growing, the bank’s profitability (Esteban-Sanchez et al., 2017; Forcadell & Aracil, 2017; Miralles-Quiros et al., 2018; Shen et al., 2016; Wu & Shen, 2013). Therefore, Russian banks should expand their sustainable development practices: Firstly, actively dealing with social and environmental components; secondly, dealing with a segment of green and sustainable banking products

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in the Russian banking and financial markets; and thirdly, adopting internationally recognized reporting standards, for example, GRI and developing international cooperation in this sphere.

Appendix: Sustainable Banking Performance Framework (SBPF)

Indicators

Points: yes (2), no (0)

First group: sustainable banking products and services (40%) 1. Sustainable financing 2. Climate fund 3. Environmental loan 4. Micro-finance 5. Sustainable advocacy services 6. Green mortgage 7. SOI/Socially responsible investment 8. Financial inclusion product 9. Venture capital for environmental saving product 10. Green bond Second group: indicators of the environmental management system (10%) 11. ISO 14,001 / ISO 14,001 certification 12. Sector-specific exclusion 13. Environmental risk management in lending policy 14. Quantitative information about environment care initiatives 15. Environmentally friendly technologies Third group: social development indicators (20%) 16. Community involvement programme 17. Charity and sponsoring 18. Increasing financial literacy and credit counselling 19. Training and Skill development programme 20. Community consultations 21. Targets for community investment 22. ISO 26,000 / ISO 26,000 certification 23. Health care and sanitation programme 24. Access points for financial services in low populated or remote areas 25. Improved access to financial services for disadvantaged people The fourth group: internal socio-ethical indicators (10%) (continued)

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(continued) Indicators

Points: yes (2), no (0)

26. Policy and procedure concerning Anticorruption 27. Policy and procedure concerning Human right 28. Policy for business ethics/values 29. Labour practices 30. Gender equity and diversity Fifth group: indicators of compliance with international sustainable development and reporting principles (20%) 31. Sustainability report disclosure 32. Business responsibility report disclosure 33. Environment policy 34. GRI membership 35. Signatory to Equator Principles 36. Adherence to UN Global Compact principles 37. Signatory to UNEP FI 38. Adherence to NVGs disclosure 39. BSE GREENEX Indexing 40. Member of Dow Jones Sustainability Index

References Alfa Capital. (2019). Available at: https://www.alfacapital.ru/news/news/301 02019.html. Accessed 15 June 2020. Alshehhi, A., Nobanee, H., & Khare, N. (2018). The impact of sustainability practices on corporate financial performance: Literature trends and future research potential. Sustainability, 10 (2), 494. Amacanin, M. C. (2005). The strategic implications of corporate responsibility and sustainability in the UK banking sector (Doctoral Dissertation). University of Nottingham, Nottingham. Central Bank of Russia. (2019). Koncepcii po opganizacii v Poccii metodologiqeckoỦ cictemy po pazvitiЮ zelenyx financovyx inctpymentov i ppoektov otvetctvennogo invectipovaniЯ. Available at: https://cbr.ru/Content/Document/File/84163/press_04102019.pdf. Accessed 15 June 2020.

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Nosratabadi, S., Pinter, G., Mosavi, A., & Semperger, S. (2020). Sustainable banking; Evaluation of the European business models. Sustainability, 12(6), 2314. Nwagwu, I. (2020). Driving sustainable banking in Nigeria through responsible management education: The case of lagos business school. International Journal of Educational Management, 18, 100332. Papastergiou, A., & Blanas, G. (2011). Sustainable green banking: The case of Greece. MIBES, pp. 204–215. Porter, M. E., & Kramer, M. R. (2011). Creating shared value. Harvard Business Review, 89, 62–77. Post, J., Preston, L., & Sachs, S. (2002). Redefining the corporation: Stakeholder management and organizational wealth. Stanford University Press. Sberbank Private Banking. (2019). Available at: https://www.sberbank. com/news-and-media/press-releases/article?newsID=7b99a41b-ee74-44859ed4-08d04a9b2fc8&blockID=7®ionID=77&lang=en&type=NEWS. Accessed 15 June 2020. Scholtens, B. (2009). Corporate social responsibility in the international banking industry. Journal of Business Ethics, 86 (2), 159–175. Shen, C. H., Wu, M. W., Chen, T. H., & Fang, H. (2016). To engage or not to engage in corporate social responsibility: Empirical evidence from global banking sector. Economic Modelling, 55, 207–225. https://doi.org/10.1016/ j.econmod.2016.02.007. Shershneva, E. G., & Kondyukova, E. S. (2020). Green banking as a progressive format of financial activity in transition to sustainable economy. In IOP conference series: Materials science and engineering (Vol. 753, No. 7, p. 072003). Institute of Physics Publishing. Statista. (2020). Ranking of Russian banks as of April 1, 2020, by assets’ value. Available at: https://www.statista.com/statistics/1116407/russia-top10-largest-banks-by-assets/. Accessed 15 June 2020. Weber, O. (2012). Sustainable banking—History and current developments. University of Waterloo. Weber, O., Diaz, M., & Schwegler, R. (2014). Corporate social responsibility of the financial sector—Strengths, weaknesses and the impact on sustainable development. Sustainable Development, 22(5), 321–335. Wu, M. W., & Shen, C. H. (2013). Corporate social responsibility in the banking industry: Motives and financial performance. Journal of Banking and Finance, 37, 3529–3547. https://doi.org/10.1016/j.jbankfin. 2013.04.023.

Responsible Principles in Banks: Short-Term Trend or Inevitability? Inal Kishmariya

Introduction Amid escalating global environmental problems, economic instability, and social upheaval—partly linked to the spread of COVID and riots in different parts of the world—interest from regulators, investors, and clients in the level of environmental, social, and corporate risks facing companies have increased. The desire to minimize ESG business risks is a global trend supported by many banks around the world. Implementing the responsible investment principles, transforming the loan portfolio towards more environmentally friendly industries, and other steps aimed at minimizing environmental, social, and corporate risks have a positive impact on improving the prospects for sustainable development and achieving the UN Sustainable Development Goals. I. Kishmariya (B) Moscow State Institute of International Relations (MGIMO University), Moscow, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_19

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However, when it comes to commercial banks, such steps can also be economically feasible. We can distinguish several hypotheses which will indicate that sticking to responsible investment principles is economically justified in the bank’s activities: • the inclusion of environmental, social, and corporate factors in the process of making credit decisions can improve the effectiveness of the bank’s credit policy; • environmental, social, and corporate risks affect the cost of the bank’s funding; • low environmental, social, and corporate risks is a bank’s competitive advantage in the fight for talent. If the above hypotheses are scientifically proven, then low environmental, social, and corporate risks will become an obvious competitive advantage of the company and everyone will inevitably implement the responsible investment principles.

Methodology The responsible investing principles are understood in this study as PRI principles, which, in particular, require companies (including banks) to include the environmental, social, and corporate factors’ assessment (hereinafter ESG factors or ESG risks) in investment analysis and decision-making processes, as well as to disclose information about ESG risks and the effectiveness of implementing the responsible investment principles in practice. Within the framework of the study, the term “ESG factors” defines a set of indicators that reflect the business’ environmental, social, and corporate risks. “Environmental risks” imply a combination of risks of losses caused by the negligent attitude to the environment when doing business and the business’ vulnerability from the negative environmental events, such as climate change or natural disasters.

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“Social risks” imply a combination of losses caused by the negligent attitude to social problems when doing business as well as businesses’ vulnerability to negative social events, such as the talented personnel’s outflow from the country, lower education quality, growing poverty, or political upheavals. “Corporate risks” imply a combination of losses caused by the negligence to corporate governance in doing business and the business’ vulnerability to negative events caused by bad corporate governance, such as conflict of interest, fraud, conflict of shareholders or top management, risks of a key person, or the state’s attempts to influence on management decisions. The study analysed the current methodologies for assigning credit ratings used by the top international rating agencies: Moody’s Investments Services, S&P Global Ratings, and Fitch Ratings. To confirm hypotheses about the impact of ESG risks on the cost of bank funding, we analysed the issuance of Russian sovereign and corporate bonds of financial companies, using the data from Bloomberg. The data includes information on 126 corporate issues and 31 sovereign bond issues with a total issue volume of RUB 9,185.2 billion. We used the demographic data of World Population Prospects 2019, which allowed us to estimate the dynamics and the share of different generations in the structure of the world’s working population. In this paper, we will understand “generation” as defined by the authors of the theory of generations, William Strauss and Neil Howe, who interpreted generation as the totality of all people born in a time interval of approximately 20 years (Howe & Strauss, 1992, 1993, 1997). Experts still argue about the exact boundaries of generations, but we will use the boundaries proposed by the authors of the theory: the progressive generation of 1843–1859, the missionary generation of 1860–1882, the lost generation of 1883–1900, the great generation of 1901–1924, the quiet generation 1925–1942, the baby-boomer generation 1943–1960, Generation X (Generation 13) of 1961–1981, Generation Y (Millennials) of 1982–2004, and Generation Z of 2005–the present. By the “working generation”, we mean people from 16 to 62 years old.

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Results Based on the definition, the environmental, social, and corporate risks can affect businesses. However, in order to confirm the hypothesis that ESG factors can improve the credit policy’s effectiveness when making credit decisions, it is necessary to prove that these risks are substantial for the potential borrowers’ financial stability. To do this, we analysed the methodologies of the leading rating agencies: Moody’s Investments Services, S&P Global Ratings, and Fitch Ratings. Credit ratings are a universally recognized and widely used tool for assessing companies’ and countries’ financial strength. One of the best practices for analysing credit risk in banks, which appeared with the Basel Committee’s recommendations on Banking Supervision “International Convergence of Capital Measurement and Capital Standards: New Approaches” (Basel II), implies using internal ratings (IRB Approach) calculated for each borrower concerning bank models (BIS, 2004). These models take into account the probability of a counterparty’s default (PD); the share of losses in case of a counterparty’s default (LGD); the absolute value of losses in case of default (EAD); and the remaining loan term (M). Based on these indicators, expected losses (EL) and unexpected losses (UL) are determined, the value of which is included in the capital adequacy and reflects the credit risk magnitude. As part of this approach, banks assess the borrower’s internal rating, which reflects the default probability (PD). In practice, such an assessment includes not only financial indicators but also the data on the company’s external credit ratings—ratings of international and national agencies. In fact, banks compare their own analysis of the borrower’s creditworthiness with an external assessment—its credit rating. If the last rating is higher than the internal rating, then the bank can raise the internal rating and, as a result, lower the borrower’s credit risk assessment, and vice versa. At the same time, the objects of analysis differ when assessing an internal rating by a bank and when assessing a credit rating by a rating agency. The rating agencies actively worked with PRI to develop tools for taking into account the issuers’ ESG risks in assessing their credit rating,

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and they are practically not taken into account in the internal rating (Nuzzo, 2018). Even though the methodologies of rating agencies differ significantly, they include similar areas. When assessing a bank’s credit rating, for example, the quality of its assets, capital adequacy, profitability, and liquidity are analysed. It is also important to assess the operating environment, the bank’s position in the market, and the likelihood of receiving extraordinary support from shareholders or the state if necessary. The scores obtained in each area are combined with different weights, depending on the “architecture” of the applied rating model, and the credit rating is finally assessed. An important component of such models is the expert adjustments, which, if applied, can change the assessment in the field of research if the analyst believes that certain factors may affect the company’s financial condition but were not taken into account in the initial model. According to the study’s results, the rating models of Moody’s Investments Services, S&P Global Ratings, and Fitch Ratings include only a few indicators that assess the issuers’ corporate risk. These indicators are related to the transparency of the company’s ownership structure and the key person’s risk. At the same time, all agencies take into account environmental, social, and corporate risk factors when using expert adjustments, and such adjustments often affect the issuers’ credit ratings. For example, when assessing ESG banks’ credit rating, risks can affect the asset quality assessments, business position, and bank profitability if analysts conclude that these risks could affect the business’ financial performance in the future. Besides, unstable environmental conditions and social problems, in turn, can affect the assessment of the operating environment—one of the most important factors in calculating credit risk. Changes in the operating environment assessment often affect the ratings of many issuers of certain industries or countries at once. The analysis of the agencies’ work with ratings revealed many examples of the high or realized effect of ESG risks on rating actions. These examples demonstrate the impact of environmental, social, and corporate factors on the companies’ financial stability:

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• In October 2016 S&P ungraded credit rating of Carnival Corp. (a cruise company operating in North America, Europe, Asia-Pacific) to A- from BBB+, due to the background of improved working conditions and safety standards on ships, which significantly reduced financial losses from emergencies. • In July 2017 S&P downgraded Thames Water Utilities to BBB+ from A-, as the company’s operations lagged significantly behind the regulatory requirements for water use in the country, resulting constant fines and affecting the company’s financial performance. • In September 2017 S&P changed the outlook for credit rating of Banco Agropecuario SA (Peru) to ‘negative’ due to climate change, which, according to experts, significantly affected the quality of the bank’s assets concentrated in the agricultural sector. • In September 2018 Fitch Ratings revised the outlook for credit rating of Danske Bank (Denmark’s largest bank) to ‘negative’ on the back of the publication confirming the bank’s involvement in money laundering in September 2018. • In November 2018 Moody’s downgraded credit rating of Yes Bank Limited (a private bank in India) to Ba1 from Baa3, amid the unexpected resignation of several members of the Board of Directors after regulatory tightening, which raised many questions about the bank’s corporate policy. • In March 2019 S&P upgraded credit rating of International Investment Bank (an international organization, IIB) based on improved assessment of the business profile after the IIB strengthened corporate governance and management through the introduction of a proportional voting system, structure diversification, and a clear business expansion strategy. COVID-19 pandemic is a good example of realized ESG risk. The consequences of the pandemic—for example, limited mobility due to the introduced quarantine measures and a decreased disposable income— are nothing more than a realized social risk. During the period from March to June 2020, the Fitch Ratings rating agency, which assigned more than 1,440 valid credit ratings to financial institutions, performed

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659 rating actions on the ratings of financial institutions, 620 of which were negative and were associated with increased social risks. Taking into account these facts, we can conclude that ESG risks affect the companies’ financial stability and to make the internal ratings of banks and external credit ratings effectively complement each other, as well as be comparable; that is why, when assessing internal ratings of borrowers, environmental, social, and corporate risks must be analysed too, thus, making the banks’ credit policies more effective. To test the second hypothesis about the impact of ESG risks on the funding cost, we have collected data on issued sovereign bonds and bonds of Russian financial companies. It was demonstrated above how ESG risks affect the credit rating. Next, we analyzed the impact of a financial institution’s credit rating on its funding cost. To do this, we used the data on sovereign bonds and bonds of financial companies to build logarithmic functions of the type: Y = a + b ∗ Ln(DT W ) where, Y is the bond yield, and DTW is the Macaulay duration calculated based on the earliest call or retirement date (duration-to-worst). The a and b coefficients for sovereign bonds are 4.476 and 0.588, respectively. Equivalent figures for corporate issues are shown in Fig. 1. Using the difference in the coefficients of logarithmic models of bonds with different ratings, we calculated the economic benefit from raising the issuer’s rating one notch, which is shown in Fig. 1.

Fig. 1 Analysis of bond issue yield functions (Source Compiled by the author, based on Bloomberg)

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According to the study, increasing a bank’s rating by one notch saves between 4.2 million roubles (when moving from BB+ to BBB–) and 24.4 million roubles (when moving from B+ to BB–), depending on the initial rating when the issue is 1 billion roubles and the average duration is 1.4 years (the weighted average duration of all outstanding bonds of Russian financial companies). Thus, the credit rating, which is influenced by ESG risks, significantly affects the banks’ bond issue rate, that is, the funding cost. In order to confirm the hypothesis of the increasing importance of environmental, social, and corporate factors in the struggle for talent, we transformed the UN data on the population age structure in such a way so we can obtain the population structure in terms of generations presented in Fig. 2. According to the data obtained, the share of Generation Y peaked at 46% in 2005, as of June 2020 it is 38%, and it will be 36% in 2025. Representatives of this generation are now between 16 and 38 years old. They have fully become part of the working-age population in 2020, and they will constitute its absolute majority by 2025. According to the theory of generations, developed by William Strauss and Neil Howe, representatives of the same generation tend to share a special set of beliefs, attitudes, values, and behaviours, as they grow

Fig. 2 Generation change model (Source Compiled by the author, based on UN World Population Prospects 2019)

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up in the same historical conditions (Howe & Strauss, 1992). Representatives of Generation Y are very different from previous generations, as, for example, their value system is different. A study by the international agency Deloitte notes that socially useful activities are essential for them: they are quite sceptical about business in terms of the companies’ integrity and are ready to immediately reconsider or even terminate their relations with the companies whose activities or policies contradict their beliefs. According to a study by the Governance & Accountability Institute, 40% of the surveyed representatives of Generation Y chose their job guided by its sustainability in terms of environmental, social, and corporate responsibility. Of the baby-boomer generation, this figure was only 17%. Moreover above 70% of Millennials surveyed said they would prefer to work for a company with a transparent sustainability policy and would be willing to sacrifice a portion of their salary for this. The above research results, as well as the increasing share of Generation Y in the labour market, indicate an increasing role of ESG factors in making job decisions. Banks have to adapt to changing realities, and the ESG agenda can become a competitive advantage in the fight for talent.

Conclusions/Recommendations Based on the results obtained, we can conclude that environmental, social, and corporate risks affect the companies’ financial stability, and this data can be used when making credit decisions to make the bank’s credit policy more effective. The risks also affect the bank ratings and, as a result, the cost of funding. Besides, we should take into account the fact that, generationally, the growing proportion of Millennials is already of working age and Generation Z are entering working age. These groups have a different system of values, and therefore high environmental, social, and corporate responsibility, reflecting a better attitude towards personnel, while low ESG risks, a potential employer’s commitment to the principles of responsible investment, and the Sustainable Development Goals (not salary only) will guide them when choosing an employer.

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Thus, the principles of responsible investment and effective ESG risk management give banks a competitive advantage. Today, Russia is actively introducing the principles of “responsible” investment in financial and credit institutions (Panova & Kishmaria, 2020). At the same time, practice shows that the responsible investment principles cause many problems associated with different approaches to assessing banks’ ESG risks, verifying green financing instruments, and recommending various international agencies that deal with responsible investment. These problems are extremely relevant for Russian banks, which are just beginning to stick to the responsible investment principles. Today, UFG Asset Management is the only Russian company to sign the PRI principles. At the same time, several banks, such as VEB.RF, Sovcombank, and Bank Center-invest, have signed the UNEP FI’s responsible banking principles, whose goals are similar to the PRI principles. In 2019, the Moscow Exchange joined the global Sustainable Stock Exchanges initiative, and as conferences held by it jointly with international credit rating agencies and ESG agencies show, Russian banks are showing increasing interest in the principles of responsible investment and monitoring ESG factors. In this regard, an increasing role in the practices for implementing the responsible investment principles in Russia is played by the consulting companies. Among such companies, we can highlight the Gazprombank ratings and esg advisory center, which provides consulting services for issuers of green and social bonds, and also supports those companies who are obtaining credit and ESG ratings from international and national agencies. It is also important to note the activities of the National Association of Concessionaires and Long-Term Investors in Infrastructure (NAKDI), which has established the Competence and Green Expertise Center—a platform that brings together top Russian experts in the field of green financial instruments. The joint work of the financial market entities mentioned above, together with the increasingly obvious importance of the formation of mechanisms for managing environmental, social, and corporate risks for banks, will further expand the practice of introducing the responsible

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investment principles in banks, including the Russian ones, and will make this trend global and inevitable.

References BIS. (2004). International Convergence of Capital Measurement and Capital Standards. Basel Committee on Banking Supervision. Available at: https:// www.bis.org/publ/bcbs128.pdf. Accessed 18 June 2020. Deloitte. (2019). The Deloitte Global Millennial Survey 2019. Available at: https://www2.deloitte.com/content/dam/Deloitte/global/Docume nts/About-Deloitte/deloitte-2019-millennial-survey.pdf. Accessed 18 June 2020. Fitch Ratings. (2019). Introducing ESG Relevance Scores for Corporates. Available at: https://www.fitchratings.com/research/corporate-finance/introd ucing-esg-relevance-scores-for-corporates-07-01-2019. Accessed 18 June 2020. Fitch Ratings. (2020). White Paper: ESG in Credit. Available at: https://your. fitch.group/esgwhitepaper.html. Accessed 18 June 2020. Governance & Accountability Institute. (2019). Millennials really do want to work for environmentally-sustainable companies, according to a new survey of large company employees. Available at: https://www.ga-institute.com/newsle tter/press-release/article/millennials-really-do-want-to-work-for-environme ntally-sustainable-companies-according-to-a-new-su.html. Accessed 18 June 2020. Howe, N., & Strauss, W. (1992). Generations: The history of America’s future, 1584 to 2069. HarperCollins. Howe, N., & Strauss, W. (1993). 13th Gen: Abort, retry, ignore, fail . Vintage Books. Howe, N., & Strauss, W. (1997). The fourth turning: What the cycles of history tell us about America’s Next Re ndezvous with destiny. Broadway Books. Moody’s Investment Services. (2019). The impact of environmental, social and governance risks on bank ratings. Available at: https://www.eticanews.it/wpcontent/uploads/2019/07/Banking_fullreport.pdf. accessed 18 June 2020.

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Moody’s Investment Services. (2020). ESG risks material in 33% of Moody’s 2019 private-sector issuer rating actions. Available at: https://www.moodys. com/research/Moodys-ESG-risks-material-in-33-of-Moodys-2019-privat e–PBC_1218114. Accessed 18 June 2020. Nuzzo, C. (2018). Shifting perceptions—Part 3: Exploring the disconnects. Principles for Responsible Investment. Available at: https://www.unpri.org/dow nload?ac=5819. Accessed 18 June 2020. Panova, G. S., & Kishmaria, I. L. (2020). Principles of responsible investing in Russian Banks. Banking (Bankovskie uslugi), 4, 2–10. S&P Global Ratings. (2019). The Role of environmental, social, and governance credit factors in our ratings analysis. Available at: https://www.spglobal. com/ratings/en/research/articles/190912-the-role-of-environmental-socialand-governance-credit-factors-in-our-ratings-analysis-11135920#:~:text=S% 26P%20Global%20Ratings%20incorporates%20environmental,rating% 20outlooks%2C%20and%20ratings%20headroom. Accessed 18 June 2020.

Managing the Risks of Financial Intermediaries: Transforming Approaches and Reality Dmitry Panov and Irina Larionova

Introduction The activities of financial intermediaries constitute a very important sphere in the modern economy, since they ensure the transformation of the accumulated free resources of economic entities and households into investments, carry out settlement transactions, hedge the risks of their counterparties and their own, facilitate cross-border movement of capital, etc. At the same time, this activity is highly risky and not so much for the intermediaries themselves but for their counterparties. In the case D. Panov (B) Moscow State Institute of International Relations (MGIMO University), Moscow Exchange Group, Moscow, Russia I. Larionova Moscow State Institute of International Relations (MGIMO University), Finance University under the Government of the Russian Federation, Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_20

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of an unprofessional risk management by a financial intermediary, there may be negative consequences for the intermediaries themselves, even leading to undesirable macroeconomic effects, an economic downturn, and in an extreme case a crisis. In this regard, the boundaries of risks accepted by financial intermediaries are rather strictly regulated. It is known that regulation is internationally recognized as important in order to ensure financial stability, which is required to allow the development of unified standards, primarily in the field of microprudential regulation. The centre for the development of such standards was the Banking Committee on Banking Supervision, created under the Bank for International Settlements (Committee of the Bank for International Settlements). However, to be fair, it should be noted that some scientists (Demirgüç-Kunt & Detragiache, 2011; Klomp & de Haan, 2012), based on empirical data, have not found a close relationship between the desire to limit risks through regulation and financial stability. In the sphere of regulation, which has a significant impact on the construction of risk management systems and their transformation, the problem of the intermediary’s risk profile is increasingly raised, due to the peculiarities of its business model. The scientific literature and regulatory documents provide different classifications of business models, which consider different criteria. In particular, in the banking business (e.g. in Russia), the regulator singles out the model of a universal, retail bank (a captive model). The IMF methodology lists the following types: universal banks, corporate banks, investment, transactional, retail banks, and property management banks (Deminguc-Kunt & Huizinga, 2010). The Bank for International Settlements, within the framework of the study, identifies four business models: (1) retail funding; (2) funding in the capital markets; (3) specialization in trading operations; and (4) a universal bank (Deminguc-Kunt & Huizinga, 2010). Other classifications can be cited; however, we believe that there is no convincing evidence to support the claim that universal banks are more risky than specialized banks (Benston, 1994; Dietrich & Vollmer, 2012; Curi et al., 2015). Currently, the meaningful construction of risk management systems is distinguished by its integrated nature, a shift in emphasis on managing aggregate risk, ensuring operational efficiency at a sufficient level,

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adjusting capital requirements taking into account the risk profile, and so on. Focusing on portfolio risk and economic capital models together however does not relieve the problem of model risk.

Methodology The research methodology is based on our analysis and generalization of Russian and foreign scientific literature, tackling the topics of risk management systems, modern regulations in the field of financial intermediation, general and local trends, and the results of empirical research, mainly based on the example of banks. While researching the impact of the effectiveness of financial intermediation on the risk of its business and capital, we relied on the work of Repullo (2004), Allen and Gale (2009), Gropp and Heider (2010), Casu and Girardone (2009), and Haldane and Alessandri (2009), among others; also, reviews from the European Central Bank were used. Of particular interest were some studies assessing the impact of banking regulation on risk in developing countries (Ben Naceur & Omran, 2011; Klomp & de Haan, 2014; Demirgüc-Kunt & Huizinga, 2010; LozanoVivas & Pasiouras, 2010) were used on the problems of building risk management systems taking into account the bank’s business model. In matters of income-oriented risk management, materials were used from the book by Schirenbeck, Lister, and Kirmse “Income-Oriented Banking Management”. Among Russian researchers, the works of Aleksashina et al. (2012), Isaev (2011), and others were used. The results obtained by Petriaa et al. (2019) were used on the problems of profitability of financial intermediaries’ activities.

Results Financial intermediation, like any other business, is focused on maximizing the financial result (profit) in the interests of the owners. However, this target, as already noted, implies at the same time compliance with regulatory norms and rules, alongside the specifics of

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100 80 60 40 20

89.1

NBFIs

mutual funds

private pension funds

insurers

banks

0

Fig. 1 Structure of the Russian financial sector, % (Source Central Bank of the Russian Federation, Annual report, 2019. http://www.cbr.ru/Collection/Collection/ File/19699/ar_2019.pdf)

the business model, its conduct, and its capital adequacy to cover the risk profile. In Russia, banks have a special place among financial intermediaries. Thus, according to the national regulator, the banking sector remains the main segment of the financial market (Fig. 1). It currently accounts for almost 90% of assets. In this regard, the study of the construction problems and development prospects of risk management systems in this article will be based on the materials of banks prevailing in the financial markets. Under the pressure from the recent downturn in the world’s leading economies and emerging markets, the profitability of financial intermediaries has been on a steady downward trend. In the context of persisting extremely low interest rates, the profitability of banking activities are also declining. The return on equity (ROE) of European banks in 2018 was 6.1% for the 28 EU countries, which in 2019 fell to 5.2%. The ROE level is significantly lower than the registered values in the pre-crisis period (before the crisis, ROE on average across the EU was 10.6%). At the same time, the range of fluctuations of the indicator was quite wide at the end of 2019: from a negative number (Greece - (−) 0.3) to a very high value at the level of 14.6% (Hungary) (EBF 2020). In the United States, ROE at the end of 2019 was 2 times higher than in the EU banking sector, but remained below the maximum values of the zero years (Fig. 2). The factors constraining the growth of return on capital indicators remain macroeconomic (negative interest rates); these include a high share of operating costs per $1 of gross income, a decrease in the quality

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20 15

14.36 11.38

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-5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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US Banks ROE Fig. 2 Dynamics of return on equity metric for US Banks (Source Federal Reserve Economic Data [Electronic resource] https://fred.stlouisfed.org/series/ USROE)

of borrowers (and, as a result, a decrease in the repayment of loans and bank income), regulatory restrictions, competition from fintech companies, and some others. In the COVID-19 pandemic, these negative factors have only increased their negative impact. Thus, according to the Bank of Russia, the depth of the fall in GDP in 2020 will be from 4 to 6% (CBR 2020). According to IMF forecasts, the decline in GDP in developed countries will reach (−) 8%, while developing countries, respectively, (−) 3%, which is 2 pp. below the previous forecast. In some European countries, the drop in GDP is expected to be more noticeable (France (−) 12.5%, Italy and Spain (−) 12.8%) (EBF 2020). The profitability of Russian banks before the pandemic was distinguished by high values and amounted to 19.7% at the end of 2019; however, every fifth bank was unprofitable. The share of problems and bad loans in the total portfolio of the banking sector is 3 times higher than in EU countries, and the level of capital adequacy is significantly lower (EBF, 2020). The current conditions impose increased requirements on risk management systems in credit institutions and necessitate the development of optimization mechanisms in the coordinates: risk—return— economic capital. At the same time, the optimization mechanism is

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inherently contradictory. Unfortunately, it is not possible to simultaneously minimize the level of risk, increase the profitability and ensure compliance with regulatory requirements in line with ensuring financial stability. In this regard, management is always faced with the difficult task of achieving the target level of some indicators with minimal damage to others. In general, building risk management systems on an integrated basis requires simultaneously taking into account the volatility of the external environment, evaluating new projects and complex products that involve various options for clients, constantly assessing and monitoring the effectiveness of individual operations, counterparty risks, and products, and achieving a balanced portfolio of assets. B covpemennyx ycloviЯx, c yqetom meҖdynapodnyx tpebovaniЙ, banki dolҖny vyctpaivatb vnytpennie ppocedypy ocenki pickov c yqetom cootvetctviЯ nopmativam ocenki doctatoqnocti kapitala (libo vnytpennim opientipam doctatoqnocti kapitala). In modern conditions, considering international requirements, banks must build internal procedures for assessing risks, while adhering to compliance with the standards for assessing capital adequacy (or internal benchmarks for capital adequacy). One of the problem areas in this part is the assignment of certain weights to various risks. At the same time, there is empirical evidence that the risk weights used to assess capital adequacy do not adequately reflect the actual risk of the banking portfolio, which can result in non-compliance with capital requirements and the threat of bankruptcy (Berger et al., 1995; Vallascas & Hagendorff, 2013). In the process of assessing risk and capital, at least two problems arise. The first consists of identifying and assessing the model risk, and the second is related to the advisability of using regulatory norms for weighting assets against risk. The first problem, regarding model risk, stems from management being always tempted to calibrate the level of risk in order to comply with standards, which will distort the adequacy of the formed capital up or down. The second problem, on using regulatory norms, is due to the fact that, in the case of objective measurement of the level of risks and their management in the bank, the question arises

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as to how expedient it is to apply complex regulatory requirements for weighing risks and assessing capital adequacy. The indicator of economic capital as a measure of risk is currently widely used in banking practice. Economic capital is based on a probabilistic assessment of the potential for future losses in the event of a risk materialization, being in this regard a more significant measure of capital adequacy. Schematically, the construction of a risk management system focused on the concept of economic capital can be represented as follows (see Fig. 3). It is well known that financial intermediaries cover expected losses from risk realization by forming reserves, the formation ratio of which, in turn, is either determined by the regulator or the bank’s use of internal models for assessing the probability of default while noting the loss ratio recorded in the assessment process. This approach theoretically allows credit institutions to form reserves for expected losses in asset value, based on the risk profile inherent to their chosen business model. Risk and capital management is based on the principles of its close integration into the activities and main processes of a bank. At the same time, for credit institutions and banking groups, the respective stages of risk management may differ.

Risk identification

Identification of significant risks

Quantitative assessment of risk

Improving the management system

Qualitative assessment of risk

Conformity assessment and audit of the risk management system

Credit risk Market risk Interest rate risk of banking book Operational risk Business risks Compliance IT risks

Risk appeti te

Risk aggregation

Capital allocation Analysis of compliance with internal requirements

Pricing

Economic capital

Limits

Fig. 3 Relationship between risk assessment and the formation of economic capital scheme

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Regulators today instruct all banks to determine their appetite for risk, which quantitatively estimates the level of risk acceptable for them, in accordance with their development strategy, and which is considered when assessing capital adequacy. The task of identifying the propensity of a financial intermediary to take risks is to determine its target level, which allows them to maintain long-term financial stability under various scenarios, including stressful ones. As a rule, a company’s propensity to take risks (risk appetite) is defined as a combination of quantitative and qualitative indicators. A feature of recent years is the constant expansion of the list of risks, among which—along with traditional financial risks—a special place belongs to operational risks. Managing technology and cyber risks requires critical thinking and hands-on experience in technology, business, and risk. It is difficult to find specialists of this profile with knowledge and competencies in all these areas. Therefore, financial intermediaries need to fund training and retraining of staff, invest in people who can effectively collaborate with IT departments, and act as a partner in making strategic decisions. Currently, there is a growing demand for candidates with the Threat Hunter skills, who have the ability to independently conduct proactive monitoring and prevent incidents in the early stages of their occurrence, which is facilitated by many global trends in the development of narrow areas of cybersecurity. The risk management process has and will (to an even greater extent) acquire the features of minimal manual intervention in risk assessment, which will reduce operating costs and the inherent risks of erroneous actions. It is expected that the advisory support of financial intermediaries to their clients will increase, and the need for corporate values and culture will increase. The operating model of financial intermediation will undergo a revision, which may change significantly due to the penetration of the latest technologies into the field of valuation. However, these processes will lead, in our opinion, to the strengthening of the analytical function as the basis for making managerial decisions.

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Conclusions/Recommendations The sphere of financial intermediation—due to the specifics of this business and its weak connection with the processes of creating real value, but also its simultaneous accumulation of significant financial resources—is under the close scrutiny of regulators who establish rules and regulations in the form of risk limits. Operating with intangible assets, institutions of financial intermediation find themselves in a very sensitive zone of risks, which makes higher demands on management in terms of timely identification, assessments, and making lightning-fast management decisions. The current situation is developing in such a way that regulators are constantly expanding and complicating the rules and norms for assessing risks, while simultaneously being one step behind reality. This trend is developing against the background of a significant slowdown in economic growth in developed and emerging markets, leads to a decrease in the quality and depreciation of assets, and affects the marginality of activities. In this regard, the risk management process is based on the search for effective ways to aggregate risk, assess of compliance with the risk appetite, and take into account the chosen business development model and capital adequacy for absorbing risks if they are realized. The rapid introduction of innovations and technologies significantly facilitates the risk assessment process and contributes to cost reduction, while increasing the need for an objective analytical assessment of management results, including the implementation of stress scenarios, as well as making additional requirements for reliability and operational risk management, especially in terms of cybersecurity.

References Aleksashin, P. G., Aleskerov, F. T., Belousova, V. Y., Popova, E. S., & Solodkov, V. M. (2012). Dynamic analysis of business models of Russian Banks in the period 2006–2009: Preprint WP7/2012/03. Moscow: House of the Higher School of Economics

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Allen, F., & Gale (2009). Understanding financial crises. Oxford: Oxford University Press Bank for International Settlements. (2018). Structural changes in banking after the crisis. https://www.bis.org/publ/cgfs60.pdf. Bank of Russia. (2020, July). Review of the banking sector of the Russian Federation (Internet Version). https://www.cbr.ru/banking_sector/statistics/. Ben Naceur, S., & Omran, M. (2011). The effects of bank regulations, competition, and financial reforms on banks’ performance. Emerging Markets Review, 12(1), 1–20. Benston, G. J. (1994). Universal banking. Journal of Economic Perspectives, 8(3), 121–143. Berger, A. N., Herring, R. J., & Szegö, G. P. (1995). The role of capital in financial institutions. Journal of Banking & Finance, 19 (3–4), 393–430. Casu, B., & Girardone, C. (2009). Testing the relationship between competition and efficiency in banking: A panel data analysis. Economics Letters, 105 (1), 134–137. Curi, C., Lozano-Vivas, A., & Zelenyuk, V. (2015), Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all? Journal of Banking & Finance, 1(1), 22–35 Deminguc-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and return. Journal of Financial Economics, 98(3), 626–650. Deminguc-Kunt, A., & Detragiache, E. (2011). Basel Core Principles and bank soundness: Does compliance matter? Journal of Financial Stability, 7 (4), 179–190. Dietrich, D., & Vollmer, U. (2012). Are universal banks bad for financial stability? Germany during the world financial crisis. The Quarterly Review of Economics and Finance, 52(2), 123–134. European Banking Federation. Banking in Europe: EBF facts & figures 2020. Gropp, R., & Heider, F. (2010). The determinants of bank capital structure. Review of Finance, 14 (4), 587–622. Haldane, A.G., & Alessandri, P. (2009). Banking on the state. Presented at the Federal Reserve Bank of Chicago Twelfth Annual International Banking Conference. https://www.bankofengland.co.uk/-/media/boe/files/ paper/2009/banking-on-the-state.pdf. International Monetary Fund. (2017). Global financial stability report, 2017 . https://www.imf.org/en/Publications/GFSR/Issues/2017/09/27/global-fin ancial-stability-report-october-2017.

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Isaev, R. A. (2011). Banking management and business engineering. Moscow: INFRA-M. Klomp, J., & de Haan, J. (2012). Banking risk and regulation: Does one size fit all? Journal of Banking & Finance, 36 (12), 3197–3212. Klomp, J., & de Haan, J. (2014). Bank regulation, the quality of institutions, and banking risk in emerging and developing countries: An empirical analysis. Emerging Markets Finance and Trade, 50 (6), 19–40. Kommersant. (2020, March 8). [Electronic resource]. https://www.kommer sant.ru/doc/4390940. Lozano-Vivas, A., & Pasiouras, F. (2010). The impact of non-traditional activities on the estimation of bank efficiency: International evidence. Journal of Banking & Finance, 34 (7), 1436–1449. Petriaa, N., Caprarub, B., & Ihnatovic, I. (2019). Determinants of banks’ profitability: Evidence from EU 27 banking Systems. In 7th International Conference on Globalization and Higher Education in Economics and Business Administration, GEBA 2013 EBF Banking in Europe: EBF Facts & Figures 2019. https://www.ebf.eu/wp-content/uploads/2020/01/EBF-Factsand-Figures-2019-Banking-in-Europe.pdf. Repullo, R. (2004). Capital requirements, market power, and risk-taking in banking. Journal of Financial Intermediation, 13(2), 156–182. Schirenbeck, H., Lister, M., & Kirmse, S. (2019). Income-oriented banking management: Measuring profitability and risk in business [From German, Trans.]. Moscow: Olymp-Business Vallascas, F., & Hagendorff, J. (2013). The risk sensitivity of capital requirements: Evidence from an international sample of large banks. Review of Finance, 17 (6), 1947–1988.

Problems of Ensuring the Financial Stability of Financial and Credit Institutions in the Digital Economy Irina Larionova and Dmitry Panov

Introduction The decline in global economic growth rates against the continuing risks of uncertainty and global economic imbalances makes it necessary to search for methods to stimulate economic development while maintaining financial stability in financial markets and preventing systemic risks. In most developed countries, central banks focus on monetary methods, either keeping the official interest rate low or lowering it by pursuing a cheap money policy. However, this incentive measure has not I. Larionova Moscow State Institute of International Relations, Financial University Under the Government of the Russian Federation, Moscow, Russia e-mail: [email protected] D. Panov (B) Moscow State Institute of International Relations, Moscow Exchange Group, Moscow, Russia © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-030-71337-9_21

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yet produced tangible results. Global GDP is still growing slower than expected. According to some estimates, there was a decrease in GDP by 0.3 percentage points in 2019 compared to the previous year (up to 2.1%) in the Eurozone countries. On the other hand, the situation is different in the United States, where the economic growth rate is significantly higher than in Europe and the world as a whole (EBF, 2018). In other words, national regulators pursuing a cheap money policy rely on the stimulating demand for credit resources from economic entities and households. The current favourable macroeconomic situation in the Russian economy has allowed the Bank of Russia to consistently lower its key interest rate over the past five years. At the same time, a series of crises that affected both developed and developing countries at different periods, along with the echoes of the global financial and economic crisis of 2007–2009, reduced the number of operating credit institutions, their branches, and the number of people employed in this sector, yet also increased the number of clients served per employee, partly owing to technological innovations. At the same time, a moderate inflow of funds to the banking sector, for example in the Eurozone, continues against the background of some reduction in credit activity. The EU’s financial and credit institutions have formed a capital adequacy level that meets the regulatory norms. There is a decrease in the volume and share of non-performing assets compared to the crisis and post-crisis periods. However, not all Eurozone countries show signs of financial stability. The situation in the Russian banking sector is somewhat different. On the one hand, the financial stability of the sector is supported by positive macroeconomic indicators (low inflation, relatively stable prices, sufficient reserves, etc.), while on the other hand, the revocation of banking licences continues, the quantity of banks and their branches is decreasing, the share of a limited number of banks occupying dominant positions is growing, the competitive environment is deteriorating, regulatory costs are increasing, etc. These phenomena are also accompanied by positive microeconomic indicators that point at the financial stability of the Russian banking sector. This brief overview of current trends allows us to highlight the most urgent problems faced by modern economies and, above all, those faced

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by the banking sector: (1) ensuring financial stability in financial markets and the banking sector is a priority policy of monetary authorities and regulators; (2) financial stability is ensured by restrictive measures proposed by regulators to the detriment of economic growth; (3) regulatory costs have negative macroeconomic effects; and (4) international regulatory standards broadcasted by the Bank for International Settlements and consistently implemented by national regulators increase the risk of information asymmetry lead to a decrease in mutual trust of financial market participants, and may become a source of a new banking crisis.

Methodology The methodological basis of the study consolidates the works of both Russian and foreign scientists, experts, international organizations, central banks and individual credit organizations, which to some extent addressed the financial stability of the banking sector, its institutions and the impact of regulation on economic development. The study used general scientific methods: abstraction, an ascent from the abstract to the concrete, typology, induction, deduction, analysis, synthesis and unity of both historical and logical paths.

Results Problems of ensuring financial stability include theoretical and applied aspects. Unfortunately, the interpretation of the term “financial stability” is quite ambiguous. This term is widely used in foreign academic literature and regulatory norms, while in Russia the term “financial sustainability” is preferred. Some believe that the term “financial stability” was originally proposed in 1986 by Minsky (Macmillan, 2019). However, in our opinion, it is impossible to say that these terms define the same phenomenon. We believe that financial stability is a complex character of a monetary institution’s activity, reflecting the potential for restoring stability being both externally and internally influenced. It is

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the probabilistic characteristic that reflects compliance with the normative values of traditional quantitative and qualitative indicators (asset quality, capital adequacy ratios, liquidity, profitability and management) at a certain date. Financial stability is a broader concept that characterizes the ability of the system to be in equilibrium (stability) and to maintain it under the influence of external and internal factors during the transition from one state to another. This interpretation emphasizes the dynamic nature of stability, although there is another approach when stability is considered as a state close to stagnation. Foreign (non-Russian) authors define financial stability as a continuum with a corresponding set of combinations of financial components in different periods (Schinasi, 2004). Others associate this term with constancy (Hung et al., 2018). Despite the differences in interpretations of the term, almost all authors agree on one thing: financial stability is the ability of financial markets to limit, prevent and eliminate imbalances before they become a threat to the economic system itself or its processes. In this regard, financial stability can be examined from two points of view: on the one hand, it is achieved using a strict model of banking regulation and risk limitation; on the other hand, it prevents banks from expanding their business activity in the market. In other words, financial stability does not have a direct impact on economic growth. Given the financial stability of the banking sector and the financial market, we can see a slowdown in economic growth. At the same time, financial stability has time limits. Both developed and developing economies are currently trapped in this situation. In general, the banking sector and the financial market have achieved a stable position, but it is not a source of economic growth. It is no secret that the Basel Committee on Banking Supervision (BCBN) has been periodically reviewing international standards for microprudential regulation for several years. Today, following the BCBN recommendations under Basel III, new standards for capital structure have been introduced, and the list of capital adequacy standards was expanded; monetary institutions are obliged to create multiple buffers of capital and adjust profit if the funds are insufficient; systemically important institutions in the banking market must comply with two additional liquidity ratios, short-term (Liquidity Coverage Ratio (LCR))

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and long-term (Net Stable Funding Ratio (NSFR)); an indicator of financial leverage was introduced; large banks are required to conduct regular stress testing; and this is not a complete list. Furthermore, the regulator constantly adjusts its requirements in attempts to prevent the appearance of financial bubbles, thus increasing the risk factors for credit requirements in certain market segments, which leads to an additional burden on the profit and capital of commercial banks. Also, the factor caused by a decrease in the key interest rate has been added to the number of external factors of instability, which affects the spread range (the difference between deposit and credit interest rates), leads to a rise in the cost of long-term resources, and reduces the demand from banks for this type of resources. Moreover, narrowing the spread increases the negative effects, significantly reducing the interest margin compared to changes in the level of interest rates. Following the new financial stability standards (Basel II and III), monetary institutions faced high transaction costs. Developing the methods for assessing the risk of borrowers based on the probability of default was the most expensive stage. Banks (subject to the validation of individual models by the regulator) can use them in their activities, forming reserves in accordance with their asset rating levels. There is a danger in allowing a certain amount of freedom in risk assessment based on advanced quantitative models rather than on standardised BCBS approaches. These tools can be used to optimize the ever-increasing regulatory costs. For example, they can be used to create an illusion that risks have been properly assessed and protected by the specially allocated reserves and capital. In other words, despite the attractiveness of creating individual metrics for assessing the probability of counterparties’ default and of forming reserves adequate to the accepted risks to respond to the resulting claims, their application can be quite costly. Besides, banks may also be tempted to optimize the cost of the reserves formed at the expense of reliability. The need for commercial banks to meet new risk assessment standards in the face of declining market returns harms the profitability of their operations and the investment attractiveness of the banking business. Small banks that have limited development opportunities are now

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in a more difficult position, despite the transition in the Russian Federation (as an example) to a system of proportional regulation, i.e. a more lenient model that takes into account the small scale of their activities and capital. It is also important to note that we can distinguish two types of regulation impacts on the banking sector’s financial stability: direct and indirect. The sphere of direct impact is related to the microprudential requirements for credit institutions, as discussed above. The sphere of indirect impact in the Russian Federation implies monopolizing the financial services market, weakening the competition, making financial market institutions asymmetrical from the territorial and geographical points of view, initiating conflicts of interest and so on. As a result of a series of crises and the pressure sanctions place on the subjects of the Russian banking sector, a dissonance has formed: most assets and capital of the sector are owned by the state. By the start of 2019, the state’s share in the assets of the Russian banking sector reached 73% and remained the same for a year, exceeding the previous year’s figures by 10 percentage points (Association of Banks of Russia, May 2019). At the same time, the state can put dual pressures on the development of the banking sector. On the one hand, the presence of the state in the capitals of large banks contributes to the systemic stability of the sector, since this group of banks can count on support, if necessary. On the other hand, this support undermines the very essence of the institution’s financial stability, thus disturbing the balance between private and state banks. It is also worth mentioning that state-controlled banks are very important for keeping the system balanced, and the history of banking systems shows that it is the major players who usually carry the systemic risks and reduce the barrier to ensuring financial stability. The dominance of banks with state ownership of capital affects the competitive environment, reduces the effectiveness of financial intermediation and affects the price of banking services, their availability and their compliance with customer requests. The observed consolidation of banking institutions against the national regulator’s policy aimed at getting rid of unscrupulous participants, pursuing a strict microprudential regulation policy, has radically

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reduced the number of credit institutions and their divisions. Despite compliance with global trends in this area, while also taking into account the rapid development of technologies, this trend does not cause concern at first glance. This phenomenon increased the number of operating credit institutions in Central Russia and lowered the presence of banks in other regions. Another worrying factor was the unprecedented rate of introducing technological innovations; individual large banks created ecosystems that have become inconvenient to control. Rapidly developing technologies have made room for unprecedented risks of cyber threats and fraud. Currently, existing regulatory rules and regulations are aimed at limiting risks, which means that they contribute to ensuring financial stability, both for individual institutions and the system as a whole. However, the downside of this generally correct direction is restricting business activity and losing a close relationship between the banking and the real sectors. In this regard, it is wrong to consider the financial stability of the banking sector in isolation from the economy and its sustainable development. The main trend in the Russian banking sector over the past two years has been a slowdown in the growth rate of its institutions. In the growth rate of individual deposits’ inflow, there has been a decrease, as has also been observed in the funds of the enterprises’ accounts against the background of high credit growth in certain segments of the credit market, particularly for consumer lending (SberDannye, 2019). We believe that, to a large extent, financial stability in the national economy is provided by reduced demand, including that for banking services, alongside unprecedented regulatory restrictions that have exceeded the standards applied in several developed and developing countries. According to some experts, with whom it is difficult to disagree, the introduction of microprudential restrictions based on international Basel III standards is justified during periods of economic overheating rather than stagnation. We believe that the current actions performed by the Russian national regulator (the Bank of Russia) do not fully meet the needs of the national economy, sometimes even harming the business climate and the interaction of the banking and real sectors

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of the economy. The results of research conducted by the Long-term Economic Impact Group (LEI) and the Macroeconomic Assessment Group (MAG) in 2010 confirm that the costs associated with higher capital and liquidity level requirements slow down the development of lending, affecting economic activity. In this regard, it is interesting to analyse the results of some studies on the impact of capital requirements set by Central Banks following the BCBN standards of loan interest rates, on the spread between credit and deposit interest rates, and on credit growth. Experts assessing the relationship between interest rate spreads and bank capital adequacy indicators, taking the example of UK statistic data for the period from 1992 to 2012, found that, in the long term, with an increase in capital adequacy by 1 percentage point, the spread will grow by 9.4 basis points (de-Ramon et al., 2012). Other authors (Šutorova & Teply, 2013), using a significant sample of banks (out of 594 European banks) for the period from 2006 to 2011, demonstrated that loan rates increase by 19 basis points, with an increase in capital adequacy by 1 percentage point. It was also found that full implementation of the Basel III package will lead to a 2% reduction in lending in Europe (Fraisse et al., 2015), while clarifying that an increase in capital requirements by 1 percentage point leads to a 1% reduction in lending due to a reduction in the number of loans granted to customers. In the above works, the multidirectional effects of the microprudential regulation’s transmission mechanism are highlighted. The authors concluded that the potential for interest rate spreads on corporate loans is higher in the short term, compared to the spreads on consumer loans (de-Ramon et al., 2012); the impact on the number of loans granted is significantly higher than that on the volume of lending (Fraisse et al., 2015). In general, the available empirical data shows that stepping up in capital adequacy requirements by one percentage point makes banks reduce lending volumes in the long term by 1.4–3.5% or reduces the growth rate of lending by 1.2–4.6% (Table 1). According to some expert estimates, introducing short-term liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), as well as increasing capital ratios, can lead to a decrease in GDP growth rates.

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Table 1 Assessing the impact of increasing the capital adequacy ratio by 1 percentage point on the credit volume and growth

Works MAG (2010) Fraisse et al. (2015) Aiyar et al. (2014) Bridges et al. (2014) Messonier and Monks (2014) Noss and Toffano (2014) Meeks (2014) ˇ Sutorova and Teply (2013) DeRamon et al. (2012)

Reduction in lending volumes (%)

Reduction of credit growth rates (%)

1.4

Country

Period evaluated

Accumulated effect period (months)

15 countries France 2008– 2011

24

England

1998– 2007