Date: December 9, 2016
The banking sector continues in the media spotlight. The bankruptcies of financial institutions and the protests at their doors have become the new normal. However, unprecedented is the new bill introduced by the president to the parliament in an urgent procedure, proposing to compensate the depositors for the fraudulent schemes of the Mykhaylovskyi Bank owners using the state budget funds. The political conflict around National Bank continues; nearly every second member of parliament calls on its governor, Valeriya Gontareva, to resign. One of the key opponents of Valeriya Gontareva in the public arena is the head of the Parliamentary Financial Policy and Banking Committee Serhiy Rybalka.
Actually, this attitude is true for the entire Radical Party parliamentary fraction that he also represents. One of the key elements of their opposition has been elaboration under Rybalka's leadership of a strategy for the development of the banking sector until 2020, a strategy alternative to the official strategy of National Bank and one that has found many supporters in the parliament. Also, two months ago, two draft bills initiated by Rybalka were registered: one on increasing transparency in NBU's work and its accountability before the society, and another one, on increasing efficiency of Deposit Guarantee Fund. What are the motivations behind all this work? Is it just raising the party's electoral rankings, earning personal dividends or something else? ZN.UA correspondent tries to find out the truth in the interview with Rybalka published below.
— Have you not been bothered by the National Bank's reaction to the strategy and the bills you proposed? NBU's officials have both openly stated and insinuated that the measures proposed would undermine the stability of the banking system. Antagonism is clear, even though National Bank and the members of parliament should be collaborating actively, especially given the complexity of the current economic situation.
— The latest public criticism we received from NBU, unfortunately, lacks professional arguments and is highly political instead. While National Bank does not have a right to focus on politics. But the debate is what gives birth to the truth. The society and the experts should see that the central bank's vision is not the only possible one, that there are alternative ways, a different viewpoint. That is why we initiate expert discussions all the time. They help create ideas that we then transform into new draft bills.
Today, our committee is one of the most active in the parliament not only in terms of the quantity but also the quality and importance of the draft bills we propose. Some say that Rybalka and the Radical Party are the only ones criticizing Gontareva. Even though our fraction has been actively criticizing the work of NBU at least since early 2015, when demanding resignation and uncovering various 'secret schemes' had not yet become political mainstream, and we were clearly the minority back then, now the negative assessment of NBU's actions is a consolidated opinion of all the members of the committee that includes representatives of the majority of the parliamentary fractions.
I have a principle developed during my time in business: if you criticize, offer alternatives. I believe that the country should have a strategy for development. That we should realistically evaluate our abilities and plan for the development of Ukraine's economy for 10-15 years to come. Because, in order to stop our degrading into poverty and finally raise the level of welfare for our citizens, we not only have to ensure stable economic growth. We also have to stop the technological degradation of the industries that has greatly accelerated in the past several years. But it will not happen by itself - we will need systemic effort applied by all government agencies. And we need a quality plan and detailed strategies for every sector of the economy.
Our committee has virtually become the first one in the parliament to have proposed a systemic vision for our sector. It is reflected in the Strategy for Development of Banking Sector until 2020 that was elaborated by academia, NBU officials, leading economists and members of the committee. We need to create similar strategies for the industrial policy, defense, and the arts. Up until now, the parliament has not produced documents of this kind at all. We had always relied on the government or on the National Bank or even on foreign institutions. Using this document, we tried to engage the academia and the government in the discussion on Ukraine's future.
—Some believe that the criticism of NBU by Serhiy Rybalka and Oleg Lyashko is either motivated by something personal or that it is just a convenient stance for building up their political image. Just like for Timoshenko and Taruta whom Gontareva has accused of lobbying for the interests of a specific bank. So what is your motivation, in the end?
— My interest is to develop the economy and ensure active engagement of banks in the process. When working on the strategy, we envisioned that, unlike in the similar document by NBU, the banks must not operate in isolation from the economy but instead they must play an active role in advancing economic growth. And in general, economic growth must become the key goal for NBU and the majority of other government agencies. Containing inflation, monetary policy, interest rates — all those are just tools. To put it simply, we believe that NBU has to create conditions for lending, ensure availability of capital for Ukrainian real sector companies, especially those using sufficiently advanced technologies. National Bank must help banks recover and refrain from closing healthy financial institutions for political reasons or in pursuit of personal gain, as well as from 'killing' midsized banks that used to give loans to the small and medium businesses. We also should take care of the specialization for the state-owned banks so that they would support exporters, lend to small companies, develop the middle class. In this context, creation of an export credit agency proposed by our fraction and the deputies from other fractions is also one of the important areas of work for building institutions stimulating growth.
My interest is also to make NBU's work more transparent because today many confuse independence with impunity and permissiveness. Moreover, my interest is to protect the millions belonging to individual depositors and Ukrainian businesses. Because every bank failure hits hard not only hundreds of thousands of people but also our plants that may never recover. And this would mean losing jobs, salaries, taxes and even unique know-how. Any banking crisis is a great shock for the future of the country's economy.
— Valeriya Gontareva and a number of experts have openly stated that the committee proposed reducing the regulator's authority which would contradict both our international obligations and the global principles of work in the banking sector. Are you trying to take National Bank under control?
— This is a manipulation. And National Bank understands it very well. One and a half year ago, when Ukraine's economy was in a deep crisis, the country experienced immediate need in the IMF's loan. Taking advantage of the situation, National Bank submitted to our committee a last minute draft bill on increasing its own institutional independence. This was one of the IMF's conditions. Realizing the importance of this document in the crisis conditions, we had to consider the draft bill urgently, in violation of all the procedural norms. The meeting lasted until late at night and we worked on hundreds of amendments. In the end, the bill passed. But NBU applied every effort to eliminate any norms on its accountability before the parliament. When Oleg Lyashko and I went to the prime minister Yatsenyuk and asked him whether IMF demanded this specifically, his response was negative. Apparently, NBU simply decided to take advantage of the committee and the chaos in pursuit of its own goals.
As for our draft bill, it is entirely based on the international experience and, first of all, on the European legal framework and practice. The key idea is that the central bank has a strictly defined objective while it is free to choose the means for realizing it. This is the independence component. And if we look at the central banks of many successful countries, their independence is based on the transparency and openness to the public. The people who are basically the employers, the shareholders of NBU must understand why such and such decisions have been made. If we look at the situation in Ukraine today, I think we would all be curious to look at the documents that served as the basis for deciding on the banks' insolvency, for shutting them down, as well as documents about the measures taken or that could have been taken to save those institutions. All of this information is now unavailable, even though it is crucially important for the society, and we argue for making it public.
Besides, we believe that it is necessary to expand the authority of the Council of NBU whose power also was undermined during the passing of the previous version of the law. The newly elected members of this body have demonstrated quite a constructive position, willingness to work and make decisions. I am confident that the Council must receive the relevant tools, conduct an audit of all the decisions made by NBU recently, and publish the results.
— You mentioned that your draft bill was based on the international experience and the European legal practice. Could you specify what do you mean by this statement?
— Several academic institutions simultaneously conducted research on the work of central banks around the world. The experts have noted that the key prerequisite for the independence of central banks in European countries is their transparency and accountability to the public. In every country, they regularly report to the corresponding parliamentary committee. Meaning, in the developed countries, a central bank's independence is not the same as permissiveness and impunity.
We looked primarily at the example of the European Central Bank's interaction with the key EU governing bodies. Firstly, the European Parliament Committee on Economic and Monetary Affairs (analogous to our financial committee at Verkhovna Rada) hears quarterly reports by the management of European Central Bank on the decisions that have been made and the reasoning behind those decisions. During those hearings, in addition to the ECB members of the board, ECB president takes part in the hearings. Secondly, ECB management is required to reply to formal written requests submitted by the Members of Parliament, and it annually submits to the European Parliament, Council of EU, European Commission, and European Council the reports on key goals and measures taken to fulfill them. ECB reports are presented by the vice-president at a special committee meeting, and the ECB president reports during the parliamentary debate. And all this comes in addition to the regular publication of reports on the state of the financial system, consultations with businesses and other transparency mechanisms in place. In every case of a bank failure, hundreds of pages long reports are published that include a detailed description of the state of the bank prior to its failure, all the measures that have been taken by the government bodies to save it and a detailed analysis of the causes of failure of those measures.
Similar principles are applied in the national systems of different countries. Moreover, in the UK, France, Italy, Japan, central banks report to the ministries of finance, while in some other countries, central banks are part of the treasury or the ministry of finance. U.S. Federal Reserve System reports on its activity to the Congress twice a year, while central banks of Germany and Japan submit highly detailed reports to their respective parliaments on annual basis.
And what about us? We have already lost over 80 banks. And multiple times, together with the depositors and the shareholders and managers of businesses who had lost their money, we, as the deputies and the relevant committee members, tried to get at least some information. Why was the bank shut down? Why was the investor not allowed to save it? Who is guilty of siphoning off the funds? Where did the NBU's curator look? And every time, together with the depositors, we have only received formal denials referring to the bank secrecy. In our draft bill, we propose that, based on the experience of European countries, National Bank be obliged to publish all decisions related to every bank failure in detail, with a detailed reasoning, description of NBU's efforts to save the bank in question as well as reports of such bank for the past three years. Also, all the regulations of National Bank must be published in addition to the dry press-releases. Reports on the indicators of the banking system stability, volumes of credit and debt data must be published on a quarterly basis, or monthly, during periods of crises. Also, creation of a unified credit registry is now being discussed. This would make all the crooks not planning to pay their loans and the people connected to them and their managers (every accountant and formal CEO) known to every bank and regulator. This will help reduce corruption in the system, lower the risks of new banking crises occurring in the future. The winners as a result of this policy will be the entire Ukraine's economy and all the citizens, whether they are using banking services or not.
— Yes, but you and your fellow party members have gone beyond that and introduced a draft bill proposing constitutional amendments that would change the objectives of National Bank. Why?
— This initiative has been supported by many experts. Nearly 200 deputies have already signed the draft bill. A considerable part of the society understands that we need a radical change in approach to the economic development of Ukraine. This is what we are also pursuing with our draft bill to amend the law on NBU. Its key objective should become driving economic growth. Stability of prices and currency, as well as the resilience of the entire financial system are only the tools to achieve this key objective.
Look at the legally defined objectives of central banks in different countries. For instance, FRS in the U.S., apart from maintaining a stable level of prices, is responsible for high production outputs and maximum sustainable employment. The independence of the agency is limited to what it considers 'high' in a given economic context and what are the means used to achieve this. It is also legally established that FRS is a working body of the U.S. Congress and reports to the American parliament. Apart from presenting reports in the corresponding committee, the head of FRS reconciles his actions on regular basis with the minister of finance. And the majority of those decisions are connected precisely to stimulation of economic growth.
If we look at the legally defined objectives of central banks of Canada, Australia, and many other countries, they include not only maintaining fiscal and price stability, but also driving economic growth and increasing the welfare of the citizens. Among the objectives of Bank of Israel are also maintaining high levels of production outputs, employment, national income and capital investment. Those objectives, in our case, are the most important for all government agencies.
— For now, let us come back to the Ukrainian realities. Regarding the accusations against NBU implying its involvement in corruption schemes, who and how, in your opinion, should be investigating whether they are based on facts? Because here, not only the regulator's reputation is at stake, but also the trust in the national currency with all the consequences.
— The parliament must not take on the prosecutor's office responsibilities. The law enforcement agencies are the ones that must be uncovering and investigating corruption offenses. So I can only speak to those issues where the deputies have questions for NBU's management.
The first such issue is the devaluation of the national currency. The explanation seems obvious: the war, reduction in exports, annexation of Crimea. However, economists that took part in the elaboration of the strategy for the banking sector development have demonstrated in their research that refinancing of the largest scale overnight took place during the most radical changes in the dollar exchange rate in late 2014 and early 2015. Meaning, NBU gave out hundreds of millions of dollars to several banks overnight. Those would arrange speculative currency transactions, pushing the exchange rate up. And the banks that received the money, according to the established norms, did not need that support. By the way, those banks included some Russian banks, too. Is this corruption? The law enforcement must tell.
The second issue concerns access to foreign currency. Despite the fact that we have a floating exchange rate supposedly depending on the interbank market, the market itself does not exist. The reason is that NBU controlled it manually and introduced an array of limitations including limitations on selling currency to the importers. At the height of the economic crisis, the bankers and businessmen complained to our committee about the limited access to the currency that was only available for the few select institutions, or in exchange for bribes. Of course, we suggested they approach the prosecutor's office. But nobody believed in the justice and approached them.
The third issue, the mort urgent one: NBU, despite the promises to end the 'purge' of the system last fall, continues closing down banks some of which could have been saved. The funds of the companies, including state-owned companies, disappeared in those banks forever. After selling the assets of the banks failed, Deposit Guarantee Fund is unable to return to the budget even one-tenth of the money lost. We held dozens of meetings at the committee with the participation of the depositors who suffered from this. Multiple times, the deputies tried to obtain relevant information from National Bank. Yet, every time they only got denials referring to the bank secrecy. Thus, we are in a situation where National Bank allows hundreds of billions to be siphoned off from the banks, closes the banks down and then sells whatever remains for nothing through Deposit Guarantee Fund. The depositors get compensated from the budget, with the money of the taxpayers. The general amount of payments to the depositors has reached nearly 80 billion hryvnias.
— Should Deposit Guarantee Fund pay compensations to those who suffered from Mykhaylovskyi Bank, in the case of which we have even got a specific law passed? On one hand, another billion or billion and a half seem like nothing compared to the total of 80 billion, but it is the precedent we are setting that is important here. Isn't this depositors' fault that they are unable to get their deposits back? They should have taken a closer look at what they signed, shouldn't they?
— It is bad that the government starts working on the problem only under the pressure of the protesters and in an unsystematic manner. For how months have the people been ignored?
It is obvious to me that in this case, the guilty ones are the owners of the bank. The money was collected from the citizens supposedly for deposits on the bank's premises, and the agreement to be signed was about transferring money to several financial firms. Not every non-expert citizen could understand such nuances even if he or she wanted to. As a result, National Bank and Deposit Guarantee Fund are refusing to pay back to people even the 200 thousand hryvnias they are entitled to by law.
But the key question is, what happened to the National Bank's supervision here? The experts, including those from the National Police, believe that even the commercial of the bank offering overly high interest rates caused suspicion. Everybody in the market understood this was a financial pyramid. How come NBU, responsible for the oversight, had noticed nothing? At the meeting of our committee, a representative of the prosecutor's office did not rule out the possibility that, as a result of the investigation, National Bank employees could also be held responsible.
— But you wouldn't deny that a 'purge' was necessary for objective reasons, would you? And the closure of the problematic banks in the market was supposed to lead to the rehabilitation of the system and accelerate economic growth.
— The key objective of the government is to save the funds of the citizens and the businesses in the banks, conduct the 'purge' as fast as possible, avoid panic and large-scale losses for the economy. And in our country, the closures of banks continue, letting the banks take the money out.
The history of crises in other countries has demonstrated: the faster the government helps the banks recover, the faster will the economic growth begin. Among the positive examples are South Korea and Turkey. Japan lagged behind in the 1990s, this period was later dubbed the 'lost decade'. But after a very serious Asian crisis, in just five years, they shut down or reorganized not more than fifteen banks, spending 18 billion USD in total on helping the system recover. The purpose of the 'purges' has to be helping the banks get rid of the non-performing loans. In our country, the 'purge' instead has been aimed at the reduction in the number of banks and has not led to rehabilitation for the survivors. The share of non-performing loans in the total assets continues to grow. NBU is taking out of the banks all the funds available, offering its certificates of deposit with a huge interest rate. Why would the banks apply effort looking for the real businesses and lending to them? It is way easier to receive huge income from the funds deposited at NBU, idle, without having to do almost anything.
Instead, we have to create institutions that would encourage economic growth. Today, we can observe oversupply crisis around the world, as well as the advent of the new industrial revolution. Meanwhile, technological degradation of our country has accelerated. We are losing our exports at a dramatic pace. The trust in the banking sector has not been restored.
We are now back at the level of 2005-2006 by the number of deposits and loans. A number of banks have seen their outcomes considerably worsen throughout 2016. In the mid-term, we still have to live under threat of new crises. So, what happened with the rehabilitation?
How can we be talking about long-term investment when a loan today costs 20-30% in annual interest? We have to radically transform the entire economic policy.
— How exactly?
— We have to create institutions like the above-mentioned Export Credit Agency. We have to create a development bank to finance the modernization of the national enterprises, important infrastructural projects, providing cheap loans for the small and the medium businesses. Respected Japanese expert Masaru Tanaka has cited examples of Sony, Panasonic, and Mazda that had once been small and medium businesses, for a reason. The Japanese government supported them through cheap loans and after some time they have managed to capture the world markets and become potent global giants. And Japan has become one of the wealthiest countries in the world. Our goal is to make Ukraine a strong and thriving country.
For this, simply restoring economic growth would not suffice. We need to create conditions for the development of our own technologies. So that we could sell in the world markets not only unprocessed timber and simple chemical and metal products but, for instance, furniture, software under our own brands and complex machinery with high added value. So that the main chunk of profit would stay in Ukraine. Only in such case would we be able to liberate ourselves from the poverty. That is why not only do we need a rehabilitation of the financial system but also a directional shift towards fulfilling the key objectives for the long-term development of the country.