Starting from January 1 the RA Central Bank is also going to control the other substructures of the financial field besides controlling the banking system: the insurance and stock markets. The foundation of a united body for financial control can be very important for economic development, that is, of course, if the system acts and develops in a right way.
Innovations are a good solution
According to the Russian-Armenian (Slavonic) State University pro-rector Edward Sandoyan (head of financial and economical faculties) the foundation of a united body for realizing economical control (mega-regulator) is a good development in the field. Mr. Sandoyan proves the efficiency of this. During these 10-15 years a lot of financial experts in the world have understood that the modern financial markets develop neither in the traditional nor in the classical ways and very often different financial institutions enter each others’ fields when developing. In this case it is already impossible to clearly separate the fields of activities of banks, credit organizations, insurance companies and other financial institutions. “The reason is this combination”, explains Mr. Sandoyan. He also says that the reason is the technological development, because when electronic diskettes were created it was already possible to locate financial instruments on them, thus making the usage of these instruments easier for them. And these financial institutions become participants of the united financial market either by buying or selling financial instruments. “The obstacles that don’t allow banks to carry out insurance activities or insurance companies to make banking activities don’t solve all those problems. There are still risks in the markets, because all these companies operate in one field. So the risks that concern, for instance, banks, concern the other institutions too, because all these companies have mutual responsibilities and actives”, says E. Sandoyan. According to him it is already impossible to regulate the financial segments separately and in this case the foundation of a united body, which will see and control all the risks in the financial market, is a good step. “It is a pity that the authorities of our country don’t realize how important it is for our country. This is a modern development and as other countries have adopted this system the authorized bodies have made a decision to adopt it in Armenia as well”.
Financial institutions in Armenia?
As in other countries of the world, the control on financial institutions is weaker than the control on banking system too in Armenia. “In 1993-94 we decided to start reforming and developing our banking system like the other countries going through the transitional period. I think we could create one of the best banking codes for Armenia, which can be a good source for the countries in the transitional period. The Central Banks of developed countries also understand this”, says E. Sandoyan. But according to him although the Armenian banking system is one of the best transparent and trustable ones, it is still in the last place among the banks in the world. The capacity of total credit investments in Armenia covers the 7-7,5% of the GDP (this mark is more than 100 % in developed countries, as for Switzerland, it covers 250 %). The reason is the fact that there is no stimulus supporting the development of the system, in fact the other segments of the financial market are missing. “We don’t have pensions funds. This means that the institutions that can “produce” long money are missing, which is the main source that can support the other segments of the financial field, particularly the banking system. Besides that, insurance companies don’t play a serious role in our country. Armenia is one of the countries of the world placing last with its marks of capital market development. If there is no capital market, there is no chance to collect the necessary potential savings, which can support the real segment-the development of the financial market”, explains Mr. Sandoyan. He also says that the reason for this situation is the fact that our country keeps on planning the economy just like Soviet Union used to do, which means that we have production but don’t have an art of financial institutions. By the way, according to the CB head Tigran Sargsyan in order to have developed financial institutions in Armenia the public income per person should be high, so people can “not only think about surviving, but also controlling their risks”. According to Mr. Sargsyan the main obstacle of stock market development is the lack of trust in businesses and for that purpose we have to adopt rules of corporative management, so the participants are sure that their money is managed effectively.
Of course all these problems prevent the financial institutions of our country from developing well. The mentioned problem is the following: according to Mr. Sandoyan the foundation of a united control body is very important, because it is not effective to control the financial institutions separately. But in this case a question comes up: “If this mega-regulator is so good, why did they found a stock market commission five years ago and later dissolved?” According to Mr. Sandoyan during the period when this commission was founded it was too early to speak about founding a mega-regulator. But the problem was different then: did we want to have a stock market or not? This is the reason why the stock market was founded” says the former economy minister Edward Sandoyan.
The new CB structure
Yesterday Tigran Sargsyan presented the new structure of the CB as a financial mega-regulator (united control system). They have founded a new body in the CB, which is called a board of stock market (17 employees) and the president is Khachik Khachikyan (former member of the stock market). The banking system control department is renamed as financial control departments, and the banking methodological and analyzing department – as department of the system policies and analyzing activities. After dissolving the stock market Amalya Saribekyan was appointed as a member of the CB board by the order of the RA president. By the way, we asked Mr. T. Sargsyan why Kocharyan was so interested in giving such big responsibilities to the CB, to which he answered: “It will be impolite to interpret the opinion of the president”.
Difficult times for the CB activities
As a mega-regulator the CB doesn’t get a wide range of rights, but wide range of responsibilities. “It will be very difficult for the CB, because it is easier to develop the existing banking system than to found new financial sectors that are out of the banking system”, says Mr. Sandoyan.
According to him, this system that is adopted in Armenia has a very big problem. “The united control body must be independent, as well as from the CB. As far as I know there is no country in the world where this mega-regulator acts in the CB. The purposes and problems of the mega-regulator must not contradict the monetary policy because the last one from the view of the economy development is more important than the control on financial institutions, so the CB may periodically be faced with situations, when they will have to make a decision to support one field by affecting the other”, says Mr. Sandoyan. But he says that in this phase of development it is better to have such a body, even in the CB, than not to have. According to Mr. Sandoyan we have no choice, because it is 11 years that our CB operates and it is strong enough. “Besides that currently the CB establishes and develops such institutions, which have to be done not by the CB, but by the government. I mean the development of mortgage credit market, pension funds, the adoption of indexing system and the foundation of credit register. Anyway these tools will be regulated by private businesses in the future, but the CB is the body to start this process. Anyhow it is not their responsibility”.
Why should the CB be the one controlling the financial system? Because this body is one of the main operators of the market of capital. In fact the CB is one of the biggest participants of this market. And actually it turns out that the CB operates in the market with its open tools (trade), where they are the body to control the market. “Here there are serious contradictions of interests, which is not good for the CB. They should operate in a market, where they don’t have any tools to control and influence that market. The CB may be the dominant power in the market because they are informed about the information first before all the participants of the market, which is very dangerous, because here personal interests may play a key role”, says Mr. Sandoyan. According to him, the first thing the CB is going to do is to found and develop this institution (they need several years for this), and later they should take this institution out of the CB. Regarding this Mr. Sandoyan brought the following example: “People cultivate plants in glass-houses to grow them, because the conditions are good there and it is important to provide such conditions at first, but later they take those things to the forest and plant there so these plants can continue growing. But this plants may seem very nice and smell very attractive, so people may not wish to take them out of the glass-house”.
Everything is possible
We tried to ask the opinion of the president of the CB Tigran Sargsyan in connection with this. “In the future the united control body may be taken out of the CB. A new draft will be presented to the National Assembly during the coming 2-3 years, and later it will be already clear which model will be appropriate for this body to develop” said Tigran Sargsyan.
P.S. We believe that the plant in the glass-house will not smell very attractive and will be taken to the forest later.