**Banking and Securities.** Russia has agreed to bind most existing market access arrangements and to offer some additional liberalization. These commitments include: allowing 100 percent foreign ownership of banks and other non-insurance financial institutions; allowing cross border provision of numerous services including asset management services, credit cards and other types of payments; allowing foreign investment companies to own and trade the full range of securities available in Russia, including state securities and bullion, and to participate in the financing of privatization of state owned enterprises.  In addition, Russian restraints on the share of the sector captured by foreign banks will increase from about 15 percent of total investment to 50 percent.

In banking, opposition galvanized around the branch banking issue. Russia was willing to allow subsidiaries of international banks. Subsidiaries must be registered as Russian entities, have their own capital and are subject to supervision by the Russian central bank. Branches, however, do not have a separate legal status or capital apart from their foreign parent bank. In general, entry into banking services in a country is easier when branches are permitted and the U.S. Treasury has been attempting to assure branch banking is permitted in all countries admitted to the WTO. The Russian central bank maintained that it could not regulate or supervise branches adequately and that depositors would therefore be at risk.

The counterargument to the view of the Russian central bank is that theory suggests and experience has shown that multinational banks have more of their reputation on the line with a branch, and this will provide greater incentive to avoid default. Moreover, to the extent that the costs of entry through branches are smaller, the number of multinationals present will be larger with branches. Then the host country has the advantage of a larger amount of FDI if it allows branches. This is the greatest advantage of allowing branch banking, but it was also the greatest concern of the central bank of Russia--since it implies greater potential adjustment costs for Russian banks.

Of the 150 countries in the World Bank database on "Banking Regulation and Supervision" for 2003,<sup>8</sup> branch banking was prohibited in only 18. The 18 countries prohibiting branch banking were: Russia, Kazakhstan, Azerbaijan, Belarus and Ukraine from the CIS plus Bolivia, Botswana, Columbia, Costa Rica, Macedonia, Malaysia, Mexico, Nigeria, Papa New Guinea, Philippines, Serbia and Montenegro, Trinidad and Tabago and Zimbabwe. The remaining 132 countries, including all OECD and EU (25) countries allow branch banking.

It seemed that the Chinese approach offered a reasonable compromise. China allows branches, but China imposes a large minimum asset requirement on the parent bank.<sup>9</sup> The de facto consequence of this is that China only allows rather large multinational banks to enter. This both protects incumbent Chinese banks against many

> 8 See http://www.worldbank.org/research/projects/bank_regulation.htm. Rows 31, 32 and 42 provide data on branch banking.

> 9 This minimum asset requirement would have to be scheduled in the GATS commitments in order to avoid disputes with members.

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