The impact of state ownership and business models on bank stability: Empirical evidence from the Eurasian Economic Union

In the aftermath of the financial crisis, of adverse oil price dynamics and of new sanctions imposed on Russia, Eurasian regional economies have experienced an economic downturn. Using annual bank data from 2008 to 2016, this paper analyzes the effect of state ownership and business models on the financial and funding stability of banks in the Eurasian Economic Union (EAEU). We report that state ownership is strongly associated with a lower likelihood of bank defaults and mitigates the destabilizing effect of sanctions. Private banks, however, experience negative impacts of sanctions on their financial stability. In terms of business models, the financial stability of the bank deteriorates with larger size and lending growth but improves with greater short-term borrowing and capitalization. We also provide evidence that the funding stability of EAEU banks, measured by the Basel III Net Stable Funding Ratio (NSFR), does not depend on state ownership. Moreover, the funding liquidity of the Russian and Belarusian banks were negatively affected by sanctions, whereas there was no effect of sanctions on Kazakhstani banks’ NSFR. Overall, enhanced capitalization and less reliance on short-term borrowing improve the weak structural liquidity of EAEU banks.