The Banks That Couldn’t Fail

Search for “bank collapse after the Soviet Union” and you will find Russia: banks vanishing in 1998, depositors queuing outside locked doors. Search for the same thing in Uzbekistan and you will find almost nothing. No famous crash. No dramatic list of failed banks.

But ordinary people still watched their savings lose value. So how do you lose your money when no bank collapses?

That is the case.

01The inheritance (1991)

Uzbekistan did not start with a banking system. It inherited pieces of one. The new system was built from regional branches of the Soviet Gosbank and the Soviet specialized banks after independence in late 1991.

It was also extremely concentrated. At the end of 1991, five traditional banks out of 21 accounted for over 96 percent of all bank credit.

The lesson is simple: from day one, a few big institutions controlled almost all the money. And the state stood behind them.

02The money changes under your feet (1993)

After the USSR broke up, several countries kept using the Soviet ruble. In July 1993, Russia’s central bank declared that old ruble notes issued before 1993 were no longer valid in Russia. Other ruble-zone members now had two choices: leave, or give up control of their own money. Uzbekistan left in November 1993.

The transition was rough. Uzbekistan issued temporary “sum coupons” in November 1993, with a limit on how much cash could be exchanged, before introducing the permanent sum in mid-1994.

Meanwhile, prices were running away. Year-end inflation was about 885 percent in 1993 and about 1,281 percent in 1994. Cash and savings bought a fraction of what they had bought a year earlier.

No bank had to fail for savers to lose. Inflation did the damage quietly.

03Why there was no bank run

Here is the twist. A bank run needs competing private banks that people can lose faith in. Uzbekistan mostly did not have that.

For several years banks could not hold household deposits above the size of their own capital (until 1994), so most household deposits stayed in the state Savings Bank. By 1998, the state-owned National Bank of Uzbekistan alone held about 60 percent of all banking assets.

When almost everything is state-owned, failure looks different. Instead of a bank closing its doors, problems were absorbed by the system. The research literature also points to a loss of confidence in the banking system and to freezes on household deposits in this period, though we could not confirm the exact details and dates.

04The hidden problem: loans

The deeper risk sat in lending. In 1993–94, Uzbekistan replaced directed credits with central bank loans channeled through the finance ministry, mainly to agriculture, mining and steel. This was reversed in 1997.

In November 1996, new loan-classification and provisioning rules were introduced, and 17 banks with excessive nonperforming debt had their operations restricted. Even so, implementation of the rules remained difficult.

Note the word: restricted. Not closed. Weak banks were managed, not buried.

05Opening up, slowly

In 1997, a presidential decree encouraged the creation of private commercial banks. But the state remained dominant. Today there are 36 commercial banks, of which 9 are state-owned, and those 9 hold about 67 percent of all banking assets.

06When banks finally close (2022)

In October 2022, the Central Bank revoked the licenses of Turkistonbank and Hi-Tech Bank. This time there was a guarantee fund for citizens’ deposits, and depositors were told they would be repaid in full within two months.

That is what a modern bank closure looks like: a legal process, a regulator and an insurance fund, not a silent loss through inflation.

07What this case shows

When the state owns the banks, the cost of failure does not disappear. It moves. It shows up as inflation, as lost trust, as cash people keep under the mattress instead of in a bank. Nobody has to declare a bankruptcy for ordinary people to pay the bill.