«Ukrainian banking system: slowly but surely towards stabilisation», CCLS Alumni Bulletin – Autumn 2011
17.10.2011
The article is published in original language.
Ukrainian Banking System: Slowly but Surely Towards Stabilisation
A recent banking crisis of 2008-2009 in Ukraine was caused mainly by domestic economic and political factors, in particular due to 60 per cent devaluation of Ukrainian currency in October 2008. The global financial crisis of 2007-2009 served as an aggravating factor which brought already vulnerable Ukrainian economy to recession.
In addition to the outstanding issues of the Ukrainian economy, such as boosting level of public debt and rising inflation, Ukrainian banking sector is jeopardised by non-transparency and a large number of so called ‘pocket’ banks.
Since the beginning of the crisis provisional administration has been introduced to 27 banks, 13 banks have been put into liquidation, including one of the largest bank Ukrprombank, 3 banks have been recapitalised by state and further nationalised (Rodovid Bank, Ukrgasbank and Kyiv Bank), while one systemic bank received substantial financial support from the government (Bank Nadra). However, Ukrainian banking system is still recovering. Even though the number of unprofitable banks has decreased considerably, 6 banks remain under provisional administration and 19 banks -in the liquidation procedure as of end July 2011.
International financial institutions engaged in policy dialogue in Ukraine identified the following key challenges of the Ukrainian banking sector:
1) resolution of non-performing loans and gradual decrease in their ratio;
2) unlock of the local currency credit market;
3) state exit from the banking sector; and
4) development of non-bank financial sector.
Ukrainian banking sector needs reforms to provide crisis management tools and enable National Bank of Ukraine (NBU) to react promptly and efficiently in case of a crisis. One of the topical issues on the governmental agenda is reforming the deposit insurance system which would allow the Deposit Guarantee Fund to transform from a paybox to an institution with greater powers actively participating in resolution of banks (similar to US FDIC’s functions). Parliament of Ukraine made an attempt to prevent further credit crunch by passing a law (№ 7351, currently vetoed by the President) which, in particular, prohibits banks from granting consumer loans in foreign currency. According to Moody’s, these changes would allow Ukrainian banks to recover from the shock and eliminate foreign currency risk.
Currently the NBU is lobbying changes to the legislation allowing it to prohibit early withdrawal of deposits in order to prevent banks runs in the future. Arguably, this can be prevented by a number of other tools, such as effective functioning of the explicit deposit insurance scheme or timely crisis management measures, including the lender of last resort role of the NBU. Any restriction of the consumer rights may have negative effect because of low credibility of the banking system and high degree of market uncertainty. .
After the crisis, in January 2011, the NBU announced its objectives for 2011-2013, namely:
1. Gradually decreasing the inflation to 5 percent by 2013;
2. Ensuring effective and stable payment system;
3. Identifying and eliminating threats to the financial system;
4. Enhancing the NBU’s capacity to provide better service;
5. Restoring confidence in the local banking system.
To meet the objectives, the NBU still needs to (i) improve market transparency; (ii) establish effective cooperation with the Government and (iii) update the legislation enacted as the aftermath of the crisis. The NBU should also strengthen its financial stability mandate along with its monetary stability mandate as was done by the majority of the central banks that faced harsh consequences of the financial crisis all over the world. Having said that, hopefully the abovementioned aims would be implemented in practice but won’t remain just pep talks of the regulator.
Julia Kondratska
Partner of the LF "Moskalenko & Partners"
Ukrainian Banking System: Slowly but Surely Towards Stabilisation
A recent banking crisis of 2008-2009 in Ukraine was caused mainly by domestic economic and political factors, in particular due to 60 per cent devaluation of Ukrainian currency in October 2008. The global financial crisis of 2007-2009 served as an aggravating factor which brought already vulnerable Ukrainian economy to recession.
In addition to the outstanding issues of the Ukrainian economy, such as boosting level of public debt and rising inflation, Ukrainian banking sector is jeopardised by non-transparency and a large number of so called ‘pocket’ banks.
Since the beginning of the crisis provisional administration has been introduced to 27 banks, 13 banks have been put into liquidation, including one of the largest bank Ukrprombank, 3 banks have been recapitalised by state and further nationalised (Rodovid Bank, Ukrgasbank and Kyiv Bank), while one systemic bank received substantial financial support from the government (Bank Nadra). However, Ukrainian banking system is still recovering. Even though the number of unprofitable banks has decreased considerably, 6 banks remain under provisional administration and 19 banks -in the liquidation procedure as of end July 2011.
International financial institutions engaged in policy dialogue in Ukraine identified the following key challenges of the Ukrainian banking sector:
1) resolution of non-performing loans and gradual decrease in their ratio;
2) unlock of the local currency credit market;
3) state exit from the banking sector; and
4) development of non-bank financial sector.
Ukrainian banking sector needs reforms to provide crisis management tools and enable National Bank of Ukraine (NBU) to react promptly and efficiently in case of a crisis. One of the topical issues on the governmental agenda is reforming the deposit insurance system which would allow the Deposit Guarantee Fund to transform from a paybox to an institution with greater powers actively participating in resolution of banks (similar to US FDIC’s functions). Parliament of Ukraine made an attempt to prevent further credit crunch by passing a law (№ 7351, currently vetoed by the President) which, in particular, prohibits banks from granting consumer loans in foreign currency. According to Moody’s, these changes would allow Ukrainian banks to recover from the shock and eliminate foreign currency risk.
Currently the NBU is lobbying changes to the legislation allowing it to prohibit early withdrawal of deposits in order to prevent banks runs in the future. Arguably, this can be prevented by a number of other tools, such as effective functioning of the explicit deposit insurance scheme or timely crisis management measures, including the lender of last resort role of the NBU. Any restriction of the consumer rights may have negative effect because of low credibility of the banking system and high degree of market uncertainty. .
After the crisis, in January 2011, the NBU announced its objectives for 2011-2013, namely:
1. Gradually decreasing the inflation to 5 percent by 2013;
2. Ensuring effective and stable payment system;
3. Identifying and eliminating threats to the financial system;
4. Enhancing the NBU’s capacity to provide better service;
5. Restoring confidence in the local banking system.
To meet the objectives, the NBU still needs to (i) improve market transparency; (ii) establish effective cooperation with the Government and (iii) update the legislation enacted as the aftermath of the crisis. The NBU should also strengthen its financial stability mandate along with its monetary stability mandate as was done by the majority of the central banks that faced harsh consequences of the financial crisis all over the world. Having said that, hopefully the abovementioned aims would be implemented in practice but won’t remain just pep talks of the regulator.
Julia Kondratska
Partner of the LF "Moskalenko & Partners"
