Riskiness of Armenian Banks

Abstract

Although the role of banking in the economy is declining in some industrial countries, in developing and transition countries such as Armenia, which has less developed financial market, banks are the only institutions that produce the necessary information for intermediation, facilitate payments flows, allocate credit, and maintain financial discipline among borrowers. In their turn, Armenian banks are subject to market failures from asymmetries of information. On the asset side, they take on the risk of valuing projects and funding borrowers whose ability to repay is quite uncertain. On the liability side, the confidence of creditors depositors, which deteriorated throughout the last decade, is essential to a banks ability to provide deposit and payments services. If depositors have imperfect information on the bank’s actual position, if they cannot distinguish sound banks from unsound ones, then they may precipitate unjustified runs against sound banks. Hence the purpose of our study is to analyze the Armenian banks’ actual financial standing from the outside investor’s or depositor’s perspective, having under the consideration only publicly available data. Evaluation of these banks is done not relative to the banks worldwide, but relative to each other in the Armenian banking system. Also the scope of this study is limited to the influence of internal financial factors on the bank’s riskiness.