Financial Crisis, Economic Recovery, and Banking Development in Russia, Ukraine and Other FSU Countries

Abstract:     
This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including trade credits and barter trade, generating an externality on banks` interest rates. The collapse of the treasury bills market in the financial crisis triggered a change in banks` lending behavior, providing initial conditions for banking development.

Number of Pages in PDF File: 37

Keywords: banking development, institutional trap, financial crisis

JEL Classification: G3, G21, P34, O16, D82

working papers series