Bank failures in Russia: why do banks go bankrupt?

More than half of all Russian banks have gone bankrupt since the beginning of commercial banking in Russia ten years ago. It is poor macroeconomic environment that is usually blamed for banking crises. However we think that excessive risk-taking by banks themselves contributed a lot to their troubles. We model the interaction between a bank and a regulator as a dynamic game in which the regulator lacks complete information on the bank's behavior. A weak regulatory framework creates incentives for banks to take on excessive risks, while high discount rates lead to little attention being paid to banks’ reputation. We intend to test our model using an extensive data set on more than 1500 banks during 1998–1999. Possible policy implications of the project include recommendations on improving prudential regulation and creating incentives for more prudent behavior by banks.