DO FOREIGN CORRESPONDENT RELATIONSHIPS INDICATE RUSSIAN BANKS QUALITY?

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Abstract

This paper examines the relationship between foreign correspondent banking and domestic bank quality. The research compiles a unique data set from Russian language sources (Russian bank correspondent relationships, Central Bank of Russia decisions, and Russian bank financial and non-financial characteristics) and Federal Reserve sanctions for violations of correspondent bank transactions during a rare event timeframe, the Russian implementation of a de novo deposit insurance system for private banks. After controlling for financial and non-financial risk factors of Russian banks, we find that sanctions imposed on foreign correspondents are significant, additional indicators of domestic bank quality. Specifically, we observe that Russian banks who had correspondent relationships with sanctioned U.S. banks were less likely to be accepted into the deposit insurance system. These results suggest that foreign correspondents may possess complementary data useful for improving the external monitoring of banks. This study is the first to reveal the significant information content in correspondent bank associates. Recommendations for researchers and government supervisory agencies suggest future studies and regulatory policies.

Keywords: External Monitoring, Correspondent Bank Relationships, Cross-border Banking, Regulatory Sanctions, Information Revelation

How to cite this paper: Edmister, R. O., & Chernykh, L. (2011). Do foreign correspondent relationships indicate Russian banks quality? Corporate Ownership & Control, 8(2), 63-76. https://doi.org/10.22495/cocv8i2p6