Another note on the disappointing outcomes of the 'purge' in the banking sector

In the fall of 2015, Valeriya Gontareva declared that the 'purge' was over. However, throughout the period from January to April 2017, six more banks were recognized insolvent.
Date: May 30, 2017

Head of the Parliamentary Committee on Financial Policy and Banking, Radical Party fraction

Why are we always talking about the National Bank's lacking a strategy for development and about the fundamental inadequacy of its approach?

Throughout the years 2014-2017, NBU declared over 90 bank failures.

It is necessary to take the banks used for money laundering out of the market. It is critical to close down the banks that have had all their assets siphoned out already, too. However, there have been many cases where healthy banks or banks that could have been saved were closed down fast.

While, at the same time, National Bank took months and even years to close other, clearly insolvent institutions, allowing them to siphon out dozens of billions. Determining whether this was due to political motivations or personal rent-seeking is the law enforcement's responsibility.

It is important that we concentrate on the key national priorities. The world history of the largest financial and banking crises has shown: the faster the state helps banks recover, the faster the crisis will be overcome. Thus, increase in the welfare of Ukrainians is impossible without efficient operation of banks.

One of the conditions for growth is how well is the banking system developed. World Economic Forum ranked Ukraine extremely low by this indicator.

In the Global Competitiveness Report 2016-2017, Ukraine scored lowest among the 138 states by the indicator 'Soundness of Banks', was ranked 116th by the indicator 'Affordability of Financial Services' and got the 112th place by the indicator 'Ease of access to loans'.

The network of banks' branches throughout the three past years has shrunk from 19.3 thousand in early 2014 to 10.3 thousand in early 2017. As a result, our performance by the important indicator of accessibility of banking services has worsened - the number of banks' branches per 100 thousand people. According to the World Bank data, Ukraine has scored lowest score in this category.

All developed countries producing high GDP enjoy a sophisticated network of banking institutions and the number of banks' branches per 100 thousand people is higher than average across the world (12.7).

The situation is only worsening. Only in the first quarter of 2017, 312 banks' branches have been closed. Reduction in competition is yet another negative outcome of the NBU's actions.

In the fall of 2015, NBU governor Valeriya Gontareva declared that the 'purge' was over. However, it is evident that National Bank has no intention of stopping here: from January to April 2017, six more institutions were recognized as insolvent.

According to NBU, 13 more banks experiencing problems with additional capitalization are under threat of closure. Let me remind you that, according to NBU requirements, by July 11 of 2017, the statutory capital of banks is supposed to be no less than 200 million hryvnias.

In 2014, a wrong level of minimal capital was established for Ukrainian banks, 500 million hryvnias. This was 3.5 times higher than in the EU. Moreover, the reliability of banks is determined using completely different indicators.

In 2016, NBU tried setting an absurd timeline for the increase in the minimal capital - 50-60 banks simply could not comply with it. This would have undoubtedly resulted in their destruction and acquisition by competitors.

Together with the banking and the expert community, we managed to stop this attempt. Currently, the banking associations are working out a new compromise with NBU.

Together with the bankers and a large group of experts, we believe that saving small- and medium-sized banks is extremely important in order to ensure competition and perspectives for the development of the entire system. The large banks can quickly cause the economy's failure, and saving them would cost dozens of billions to the state.

A clear illustration of this case is PrivatBank. In other words, systemic risks for the economy have increased significantly. Elimination of a half of the banking system has deepened the oligopolization problem. This is confirmed by the Herfindahl-Hirschman index; its value has doubled for Ukraine over the course of the recent years.

As of April 1, 2017, the share of the six banks controlled by the state in the total assets of the banking sector amounted to 56.99%, foreign banks — 32.43%, and private Ukrainian banks - only 10.64%.

At the same time, management of some of the large banks, including foreign banks, have supported National Bank in this struggle, since they are personally interested in maintaining such policy. The large banks are gradually expanding and obtaining a larger share of the market.

The good slogans easily understandable for our foreign partners disguise the struggle of several large banks and NBU against the small Ukrainian private banks. There is no accident in the Ministry of Finance's planning to refrain from using the state-owned banks for the purposes of fulfilling a pro-Ukrainian economic policy.

If they plan on selling all the state-owned banks, those could only be bought by the foreign banks. Within 5-7 years, we will have complete control of the foreign capital taking over Ukraine's banking system. There is plenty of foreign and national studies on the potential risks this would entail, but this is a topic for another discussion.

This is why I keep repeating that the new governor of NBU must have a clear plan for the development of the banking system. The main purpose for all of the actions must be development of Ukraine's economy and considerable expansion of its technology component.

The specialists and deputies must familiarize themselves with such plan in detail before the new head of the National Bank is approved by Verkhovna Rada.

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