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18.06.2009

The future of global finance: Center-Invest Bank's view

On 17 June, at the plenary session of the Adam Smith Conference «Retail Banking Services in Russia», Chairman of Center-Invest Bank, Dr. Vasily Vysokov, presented a paper, «Sustainable banking: the foundation of the post-crisis banking system.» 

Dr. Vysokov gave an analysis of the current market situation in terms of the financial system that will emerge in the post-crisis economy.

The main points of Dr. Vysokov's report were:

  1. The global financial crisis is forcing us to seek an alternative to the current financial system and a banking business that is based on instantaneous, short-term gain and is speculative in nature. The most radical alternative is the Islamic banking business, which prohibits the charging of interest and requires that banking transactions be carried out in compliance with Sharia law. Sustainable banking («SB») envisages business development in the interests of current and future generations. This business model retains profit as an incentive, but the emphasis is on long-term profit, with due regard for environmental and social risks. In 2007 Center-Invest became the first Russian bank to be a runner-up and silver prizewinner in the «FT Sustainable Banking Awards» in the «Sustainable Banker of the Year» category. In 2008 we were one of the three finalists in the «Sustainable Emerging Markets Bank of the Year» category, and we were the only Russian bank to make it through to the final.
  2. The transition to a sustainable banking model requires that changes be made to all aspects of the existing banking system, including: markets, rating systems, accounting and reporting systems, corporate conduct, internal control, risk management, strategic planning, human resources management, branch network expansion, and product lines.
  3. The most significant change to the banking system should be its division into payment-settlement systems, on the one hand, and lending and investment, on the other. Payment-settlement systems will become an element of the global financial infrastructure and their activities will be strictly regulated. These systems will join forces, forming alliances similar to airline alliances. If payment-settlement systems want to lend money, they must operate through transparent market mechanisms. Banks should conduct their lending and investment activities solely on a commission basis; the customers themselves will bear the risks of investing their money. Every security will carry a warning, like on a packet of cigarettes, about the risks of investment: «Investment kills». Banks will no longer use short-term funds to finance long-term projects. Every «silent» depositor will be obliged to clearly state how they intend to use their funds. If this information is unknown, the funds will be recorded in the balance sheet as call deposits, and no one will have the right to calculate any revenue on the balance of these funds.
  4. Rating agencies will concentrate on evaluating investment projects and products, and not banking institutions. Moreover, every project and product should have several independent ratings, and these should be given by analysing at least 20% of the market for similar products.
  5. Accounting and reporting systems will retain their national and methodological differences, but, thanks to information technology and software, they will be able to automatically generate reports for any accounting system. Regardless of the system used, bank reporting will be public.
  6. Corporate governance will require a higher level of disclosure by banks of their internal procedures and guiding principles. Greater demands will be placed not only on banks, but also on regulators and oversight bodies to demonstrate proper corporate governance. These bodies will be obliged not only to act in compliance with the law, but also to refrain from any actions that could be interpreted as an intention to ignore rules and standards of corporate conduct.
  7. Internal control will no longer be an activity carried our solely by dedicated internal control departments; it will be integrated into the work of all bank employees. Moreover, checks will compare actions and transactions in terms of both legislative compliance and best banking practice.
  8. A risk management system will become an integral part of banking operations, but the complex methods for calculating risks, proposed by the Basel Committee, will be complemented by specific, meaningful analysis, building up quantitative and qualitative analysis like a «layer cake».
  9. Strategic planning will not only take into account risks based on SWOT-analysis of products, sub-divisions, and transactions; it will also consider post-completion project evaluations.
  10. Human resource management will be based on the framework of employment legislation and the UN Global Compact principles, and the interests of all employees will be taken into account when producing internal regulations and strategic plans for developing investment projects and programmes.
  11. When expanding their branch networks, banks will consider the impact of financed investment projects and programmes on the local area. Expansion will be aimed at the comprehensive, balanced development of the economy, environment, and social sphere of geographical areas.

Center-Invest Bank has unique experience in developing and introducing the approaches and business processes presented in Dr. Vysokov's report. We intend to continue sharing this knowledge with our customers and partners, including within the framework of our programme, «Southern Russia Versus the Global Crisis».