Three Essays on Commercial Banking in Belarus and Moldova

The main objective of this dissertation is to expand the literature on commercial banking in FSUs that are currently members of the Commonwealth of Independent States (CIS) and are still undergoing transition. By taking Belarus and Moldova as case studies, this dissertation addresses three separate research questions and aims to provide a comprehensive picture of the banking sectors in these two countries. The first essay studies the impact of the introduction of explicit deposit insurance in Belarus in 2008. Given the state’s extensive involvement in the sector and prior preferential treatment of the largest two state-owned banks, the essay addresses the following questions: was there an impact on the overall evolution of deposits and loans at all banks and was there an impact of the new deposit insurance system on small banks. Using the difference-in-difference and synthetic counterfactual approaches, the results suggest that the new arrangement had an impact on the smaller banks both in terms of faster growth of deposits and increased lending. However, the unique characteristics of the banking sector in Belarus greatly affect the results and are therefore discussed in in more details the first essay. The second essay asks the question whether depositors in Belarus and Moldova exhibit market discipline given their previous experience with a planned economic system, extensive economic crises, failures caused by fraud, and the state’s presence in the banking sector. For both countries, there is evidence of quantitative disciplining. However, there is little evidence with respect to interest rates. The specifics of each country are also discussed to understand how they affect the results. The third essay applies several early warning bank failure models to the bank failures in the Moldovan banking sector to identify the main drivers behind bank failures. Moreover, it analyses whether these findings change given Moldova’s experience with economic crises and instances of large-scale fraud. The findings suggest that liquidity ratio is the main factor behind failures. However, country’s experience with the ‘billion-dollar’ fraud plays an important role in interpreting the results. The essay also employs a multi-state model to better understand the main dynamics in the banking sector.