Ukraine seeks to stabilise banks
With financial and technical assistance from the International Monetary Fund (IMF), Ukrainian authorities are carrying out domestic banking sector reforms in an effort to resolve the problems that accumulated over the years.
Over the past year, about 40 financial institutions, accumulating 15 percent of total banking assets, were declared insolvent. According to Ukrainian legislation, the government now has to pay its depositors 50 billion hryvnia (about $2.2 billion). In total, the banking system’s loss is equal to 9 percent of Ukraine’s GDP, officials said.
Valeriia Gontareva, governor of the National Bank of Ukraine (NBU), said that bankruptcy was not inevitable, adding that some bankers acted unfairly. To increase the liability of shareholders and their managers, Ukraine’s central bank developed a bill envisioning increased penalties, such as property confiscation and a five-year jail sentence for false accounting and bringing banks into bankruptcy.
“Why is this important? Because the owners and management of insolvent banks must pay for the damages caused to the state and investors,” Gontareva said in parliament on March 6th, after the law was passed.
“If such a tool had been provided before, this amount [of state-guaranteed payments] would be much less, since shareholders and their management, who were going to transfer assets and attribute it all to the crisis, would think twice over this decision.”
According to experts, the law is a step in the right direction. Ukraine has too many banks and their owners often led risky policies, issuing loans to affiliated companies. This is especially true for small banks which have not always been in the focus of regulators, said Yaroslav Zhalilo, president of the Anti-Crisis Research Centre.
“Supervision can make a claim to the manufacturer if it uses some poisonous substance or a prohibited dye preparing a product. The same applies to banking services. We are talking about consumer protection,” Zhalilo told SETimes. “If instead of recapitalisation of the bank, the owner is trying to steal something from it and shift responsibility to the state and ordinary people, the reaction must be tough.”
According to the draft memorandum between Ukraine and the IMF, in the second quarter of 2015 the top 10 Ukrainian banks have to pass stress tests to determine their need in capitalisation. It could reach up to 100 billion hryvnia, an amount which will be difficult to find, said Oleksandr Savchenko, rector of the International Institute of Business and former deputy head of the NBU.
“The biggest problem we face is that the banking system totally has negative working capital. Now the question is to find 40-50 billion hryvnia, and turn it positive. It will be difficult, nearly impossible, to achieve the international and Ukrainian requirements in the short term,” Savchenko said, adding that the NBU is likely to withdraw an additional 15 percent of its assets from the system.
To resolve some of the banking sector problems, Ukraine could use international experience, experts said. In particular, the authorities should consider creating a “bad bank” to accumulate toxic assets, said Oleg Ustenko, executive director of the Blazer International Fund.
“Of course, this is a tough decision, and it will not be easy to realise it,” Ustenko told SETimes.
“But it is important to start making concrete steps. This also applies to the ‘too big to fail’ banks. The government gives them millions in refinancing loans, but their owners are in no hurry to cut top managers’ salaries, like it was in the US in 2008. This also applies to state-owned banks. Here, the legal restrictions should be also provided.”
Another problem threatening the banking system is dollar and euro loans, which were actively issued from 2005 to 2008 to both individuals and businesses. Due to the dramatic drop in the value of the hryvnia, most borrowers are not able to serve them, while the IMF insists on the impossibility of adopting of any law forcing banks to restructure foreign currency loans.
Thus, the NBU is trying to find a compromise to share risks between financial institutions and their clients. The central bank signed a voluntary memorandum, envisioning the restructuring of mortgage loans with 11 banks, and is hoping other banks will also join the agreement.
Another decision, increasing the central bank’s independence, is to strictly limit the growth of its portfolio of government bonds, minimising the financial support of national oil and gas company Naftogaz and the state budget. This must help to stabilise the macro-financial situation. However, experts said, though these efforts are positive, sustainable and durable peace in Donbas is required for the Ukrainian banking system’s recovery.
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