Of Brokers, Banks and the Case for Regulatory Intervention in the Russian Securities Markets

In the aftermath of the fall of the Soviet Union, Russia emerged as the largest of the newly independent states. As part of the transformation process, Russia sought to implement capitalist style securities markets. Russian financial markets have been in constant turmoil since the demise of the command economy. Almost overnight, the country faced the challenge of developing a system for privately financing Russian enterprises. A plethora of banks, brokers, and stock exchanges sprang to life, most of which were undercapitalized, disorganized, and poorly policed. The absence of effective regulatory regimes resulted in marginal compliance at best. The most critical question for the development of the markets, however, concerns the market intermediaries responsible for the capital-formation process. In developed markets, the capital-raising process is dominated either by banks or by securities firms. The type of intermediary has important implications. Bank-dominated economies possess a number of inherent attributes that can impede the capital-raising process, including less dynamic capital markets, a reduced supply of funding for domestic companies, and a greater degree of government interference. Japan and Germany are examples. Those dominated by securities firms are more receptive to the capital needs of less established companies. The development of robust securities markets remains critical to Russia's economic recovery. In order for adequate markets to emerge, Russia must develop an aggressive class of intermediaries with the ability to place shares of privatized companies. Comparative analysis suggests that, absent deliberate government policies to the contrary, bank-dominated systems will emerge. A bank-dominated system will stall economic development by creating inadequately vibrant capital markets. Consequently, insufficient funds will be available for capital, reducing the number of companies that can obtain long-term financing