Financial storm: what happened and what is yet to come?

Serhiy Rybalka: "We want to have the banking sector working with the real economy…"
Date: February 6, 2017

Verkhovna Rada Committee on Financial Policy and Banking is one of the most productive committees in the parliament. The massive bank failures, swings in the currency exchange rates, nationalization of PrivatBank had an impact of virtually every citizen of the country. The reactions of National Bank and the government to these challenges have often enough caused public disapproval. The committee took on the role of a constructive critic, formulating, among other things, an alternative agenda for the banking sector.

We talked with the head of the committee, Serhiy Rybalka about the key problems his team addressed in 2016 and about the plans for the coming year.

— Recently, you presented the strategy for development of the banking sector until 2020, causing the dissatisfaction at National Bank. Why is this document necessary and what are the chances of it ever being implemented in practice?

— Before joining the parliament, I worked in a business that I created from scratch back in the mid-1990s. If you want to be successful, you have to have a strategy. What measures do you have to undertake in order to avoid losses, earn profit, protect your employees, keep up with the technological progress - to be successful, an enterpreneur has to think all these things through. This is even more true for the state since the future of many generations to come is at stake. For 25 years, we have been talking about Ukraine having a resource economy, yet we have done nothing to change this. And in the recent years, the pace of the technological degradation has accelerated significantly. We want to increase the share of small businesses in the GDP, we want innovative solutions - but the sitution keeps worsening. An important reason is the absence of a strategy. We only have short-term goals that are not enough to allow us to thrive. Small fixes are made to the system, from election to election. While Ukraine's degradation into abysmal poverty continues.

This is exactly why we decided to start with ourselves. To show, with the financial system example, the importance of setting the goals right for all government bodies. With my fellow experts, we believe that the top 5 most important factors to ensure development of any country include a robust national financial system that could ensure long-term, cheap lending for the industries. Both the coalition agreement and the official program for development of the financial and banking sector virtually do not reflect the depth of the crisis our country is still struggling to overcome. And they, for sure, do not set the right goals.

This is why our committee was the first to develop our own strategy. We engaged famous experts, academia, and former managers of relevant department at National Bank in the process. We held a series of discussions, roundtables and conferences to collect different opinions and improve the document. A dozen of academic institutions joined the process, and the discussion resulted in a true civic movement. In the end, our committee approved the draft and recommended it to all government agencies. And in the fall, we already started registering draft bills based on this strategy.

— How exactly is your document different from that of National Bank?

— To put it in a nutshell, we want to have the banking sector working with the real economy, catering to the demands of the businesses, the industries, the ordinary citizens employed at those companies and those who receive a stipend or salary paid for by those companies' taxes. We propose what the Asian Tigers had done. The ideas of NBU, not only those of its current management, have always been limited to the superficial reforms in the banking sector. National Bank has focused attention on its own internal goals but never considered it necessary to care about the long-term goals of the entire economy. But consider the practice and the legally defined objectives of central banks in all successful countries. For instance, Federal Reserve System in the U.S. is responsible, apart from maintaining stable price levels, for high outputs of production and employment. If we look at the objectives of central banks of Canada, Australia, and many other states, they include not only ensuring fiscal and price stability but, primarily, the economic growth and the welfare of their citizens. As for Bank of Israel, it is also responsible for high outputs of production, employement, national income and capital investment. In our case, these are the most important objectives for most of the government bodies. Unless we ensure investment in high tech production industries, we will not have a wealthy state. All our crises are so painful precisely because we sell cheap raw materials to the world markets while buying expensive processed goods. The causes of our currency devaluations are similar. So, we must ensure that the financial sector reforms and, primarily, the reforms in the banking sector, as well as the monetary policy, are in line with the long-term goals of ensuring economic growth and structural transformation of our economy. It is critical to reconcile the strategy of NBU and other regulators with the long-term strategy of the government.

We believe that reforming the sector should be happening in several different areas. Firstly, increasing the responsibility of National Bank for the supervision of financial institutions and for their failures. The system must be saving banks instead of eliminating them. It is necessary to finally end the so-called 'purge' that many respected experts have already identified as a large-scale property redistribution process. Yes, it was necessary to close down a number of banks used for money laundering schemes. But how about the rest? When a healthy bank is closed down because of one dubious transaction that has not even been proved in court, many millions and billions of hryvnias worth of property are taken from the bank's owner. Yes, it might have been his fault. But these funds are also taken away from thousands of entreprises that had their accounts or deposits in the bank in question. And this is a massive shock for the future of the economy. The most important task for the governments across the world is saving the money of the depositors. This is what the trust is all about. This is the basis for the attraction of funds into the system, and, hence, for the attraction of the resources for lending for economic growth.

The second key area is a shift of the monetary policy goals towards stimulation of growth. Today, National Bank is focused solely on containing inflation, with the economy strangled by the lack of capital. NBU is only taking the funds from the banks using high interest rates on its certificates of deposit. It does not make sense for the banks to apply effort looking for real businesses and providing them with loans. This limits investment activity and does not in any way stimulate the creation of new jobs. As a result, this slows down the process of recovery from the crisis. Instead, this money could have been used for improving logistical or energy infrastructure, or creating high tech product companies.

But in order for us to be able to introduce the monetary instruments for the stimulation of growth by NBU and the government, we have to build the infrastructure. To have these funds delivered to the industry, towards investment projects crucial for the country's development, and not to the currency markets.

The third area of reforms is precisely about building such infrastructure. We have to create a system of institutions to stimulate growth. From a developmetn bank to the creation of an export credit agency. Such institutions are in place in the majority of the countries of the world. Lending to small and medium businesses under privileged conditions, support to the infrastructure projects - all this should create the conditions for an increase in the internal demand, and drive the process of economic growth. And, most importantly, only the projects with a significant level of technology iand high added value should receive cheap loans. Developing our own know-how has to eventually become more profitable than exporting unprocessed metal, timber or primitive fertilizers. Only then shall we be able to break out of the poverty trap.


— National Bank has accused you of attempting to pressure it. Should this agency be independent, as some experts have argued?

— 'Independence" is not the same as the lack of accountability. Here is a simple example. National Bank employees are not considered state officials. Meaning, they do not have to go through a special background check before employment, they are not affected by the changes in the state public wage scale, they do not declare their property in the same way. Moreover, NBU legislation is not checked by the Ministry of Justice, and the central bank legislation cannot be recognized illegal or such that violates the law in court. Currently, no one except for the President can have influence over National Bank, even if it is pursuing an obviously wrongful policy. There is no mechanism for early dismissal of NBU's management. Who could explain the reason for shutting down this or that bank? Was it done correctly or was their property just taken away? Even the experts do not know what is really going on. In all developed countries, central banks report to the parliament. Their managers typically report to their counterpart parliamentary committees on a quarterly basis. After any bank failure, extensive reports are published describing in detail all the actions undertaken and decisions made by the government in order to save the bank in question. In our country, even deputies are unable to find out the truth. We want to change this and have already introduced a package of draft bills in the parliament. And we are not trying to expand Verkhovna Rada's influence. We are only writing out mechanisms for the realization of the constitutional authority of the Council of NBU regarding the actions of the Bank's management.

Here is an example. In the fall of 2015, we organized the very first open recruitment of the members of Council of NBU in the history. To put it simply, the Council is a collegiate body that oversees NBU's actions but does not interfere in its activity. Also, the Council approves NBU's budget, in particular, the amount of profit to be transferred to the state treasury. Also, the Council approves Monetary Policy Guidelines, the key document in the financial sector for the businesses and our lenders.

For about a year, the Council of National Bank was not working at all - the government did not want to appoint new members. Obviously, conducting a 'purge' without any checks was more convenient for them. And no one except our committee demanded restoring Council of NBU as a functioning body. No one seemed to mind NBU's lack of accountability. Even when the parliament voted for the new members of the Council, various manipulations took place, in particular, with the last names of the new council members. There were attempts to have people loyal to National Bank become part of the Council. But as in the end, we managed to hold a legitimate vote. Today, we see that the Council members are willing to engage in constructive cooperation with the committee. During the process of elaboration of our strategy, we started a discussion on monetary policy. It was vigorously supported by the expert community. Our arguments were heard. For the first time, in 2016, an expert discussion on the draft guidelins for monetary policy was held. During the meeting of the expert council at the Council of NBU, former head of National Bank Stelmakh declared that this time, the proposals of the Bank's management were the weakest in the entire history of Ukraine's independence, from the professional viewpoint. We submitted our proposals on behalf of the Radical Party fraction but, unfortunately, some critical points we advocated for were not taken into account.

Here is what National Bank needs the independence for. It must not print money and close the gaps in the budget under pressure. But NBU must cooperate on a daily basis with the government and the parliament for reforming the financial system and realizing the key economic growth targets. Consider the case of the U.S.: head of Federal Reserve System is in constant contact with the finance minister. In Japan, head of the central bank is in constant contact both with both the government and the parliament. I heard about this from an ex-head of the Japanese central bank Masaaki Shirakawa. According to his words, ensuring availability of cheap credit for ecnomic gwoth is a common responsibility of the central bank and the government.

— You mentioned increasing the responsibility. What do you think about the criminal cases initiated by National Anti-Corruption Bureau against Valeriya Gontareva? Are there objective reasons for this, or is this political pressure?

— Our committee approached the President back in the fall asking him to introduce a proposal on resignation of the NBU's governor. But we have still not seen any reaction. We still believe that today, there is every reason for changing the head of the central bank. In our strategy, we present professional critique of NBU's work, with dozens of pages of numbers and graphs. Somebody just has to bear the responsibility for the large-scale currency manipulations and unchecked siphoning of funds out of the banks, as well as for the suspicious selectivity in declaring bank failures. But we are not a law enforcement agency. The prosecutor's office and National Anri-Corruption Bureau will have to present the results of investigation.

For us, it is very important to change the Natinoal Bank's policy. So that our proposals and the proposals of many experts would be taken into account, so that we could have a wide professional discussion. And our entire committee is always ready for dialogue. But our cooperative attitude remain unmatched. The decicion about approaching the president regarding the NBU's governor resignation was not taken overnight. Today, majority of the committee members who represent all the key fractions in the parliament coincide on this.

— One of the things demanded regularly of Gontareva is to stop failing banks. Why wouldn't she do this?

— One of the academic institutions is preparing a specific analysis of the state of the banking system specifically for our committee. But iwe can already say that the so-called 'purge' did not yiled the expected results. The banks' losses last year, according to the preliminary estimates, reached over 160 billion hryvnias. Obviously, a large share accounts for PrivatBank. But the situation is complicated in a number of other banks, too. The share of non-performing loans is not shrinking. The population is barely returning their moeny to the banks. This means that National Bank has to systematically change its approach to policy. Of course, we will keep pushing our draft bills on the protection of the rights of lenders and consumers of financial services, on stimulating the lending, on simplification of the merger procedures and many others. Implementation of those will yield results. But this is not enough unless we radically change the policy of NBU and the government.

— What other last year intiatives of the committee do you see as important?

— NBU set the goal of reducing the number of banks. Whatever it had to take. They are trying to eliminate almost all banks lending to the small and medium businesses. The only ones left are large foreign banks and state-owned banks. While Ukrainian private banks are often 'killed' because of their supposed serving as money-laundering machines. We do not oppose the idea of fighting money-laundering but it should not cause harm for the economy. If only the foreign banks are left in the market, the risks of the capital flight from Ukraine during future crises will rise, the risks of large bank failures are higher, while the possibilities for lending to the small and medium businesses' borrowing will keep shrinking. NBU has no strategic vision on how to create conditions for development of all types of banks, on development of the entire system.

While we have managed to impede Natonal Bank to reduce the number of such financial institutions through setting minimal statutory capital requirements impossible to meet. But this is only the first step. It is critical to save Ukraine's banking system.

We are systemically working to persuade the government in the importance of creating a sytem of inventives for promotion of Ukraine's technological exports in the world's markets. We ensured adoption of the law authored by the key members of Oleg Lyashko's Radical Party in the parliament. Now, we have to implement it and provide cheap loans to the foreign buyers of our goods, as well as provide insurance and guarantees for important export contracts. All this will allow to expand the share of high value-added goods in our exports, increase the inflow of foreign currency into the country, create new plants and jobs, and increase the welfare of our citizens. One thing is trading unprocessed metal and timber and live in the conditions of a deepening poverty, and another thing is to build a strong industry and sell abroad complex machines, robots, planes and space boosters.

We will definitely submit our proposals on the government's mid-term plan, draft version of which prime minister Vladimir Groysman recently presented.

— Any good news for the citizens?

—Firstly, we managed to get an approval on the decicion on the 2% fee for the Pension Fund that had to be paid for transactions of currency purchase. Of course, giiven the uncontrolled expansion of the shadow market of currency exchange this is not a great aachievement but, at the same time, it will help reduce the pressue on the citizens who wish to exchange currency. This reduces incentives for the people to use illegal services in order to save on the additional fees.

Another, more systematic thing we have worked on is a draft bill on transforming the entire system of deposit guarantee. We proposed to at least double the amount of deposit guarantee cap, up to 400 thousand hryvnias. Moreover, the procedure of payment will change significantly. If today, the money from the sale of a failed bank's property almost never reach the entrepreneurs or large depositors, the new law will prioritize satisfaction of their needs. Of course, after the taxes, the debt in salaries of the employees of the bank in question and the guaranteed deposits have been paid.

We keep working on a radical overhaul of legislation on insurance. We are preparing a draft bill on regulating the market of pawn shops. It would allow to regulate provision of such services, lower the risk of fraud, make the citizens think double about how much more they are paying for such services compared to the interests on the loans obtained from banks.


— What is the committee planning to work on during the coming year?

— We continue implementing the strategy for the development of the banking sector until 2020, focusing our attention primarily on restoring the levels of lending. It is necesary to prepare a foundation for the creation of a development bank and adopt a strategy on the development of the state-owned banks. It would be reasonalble to have Ukreksimbank responsible for the exports, while the development bank in charge of making the loans cheaper for internal investment projects into high tech companies and infrastructure.It is important to have state-owned banks lending to the small and medium businesses. After PrivatBank's nationalization, the share of the state-owned banks in the banking system has reached 53%. In general, all of them have become regular universal banks, with rare exceptions. The majority of functions that could be carried out by regular commercial banks should be delegated to the private institutions through the sale of the relevant assets. The state banks must not compete with the private banks. Their responsibility is the realization of the state policy, helping achieve our strategic goals and transform Ukraine's economy in a strong, stable and quickly-growing one. Our Japanese colleagues that we are currently holding consultations with, talk about this. All of our proposals and results of our work will be passed over to the government, and we will take an active part in the elaboration of the mid-term program for development of the country.

—According to your estimates, what should we expect in 2017 in terms of macroeconomics?

— Unfortunately, we see that further devaluation of hryvnia may be expected.For a resource economy that Ukraine has, this is normal: the cheaper the natonal currency, the more expensive can we sell our raw materials in the foreign markets. Moderate devaluation of hryvnias and inflation growth allows the government ot receive large inflow of money into the budget. But if prices on raw materials fall dramatically, this would mean price hikes and further impoverishment for our poplation. And this in no way would stimulate the development of the new economy, an economy built around the increase in the added value. A ton of iPhones would bring 70-100 times more income than a ton of ore. But producing the former also requires more efforts, more changes, more reforms. We still do not see this happening.

Without reforms and stimulatino of lending, we will not see economic growth. Meaning, delivering on the expanding social welfare responsibilities will only be possible using the inflation and devaluation mechanisms, as well as the new loans from IMF. Besides, devaluation is profitable for currency manipulators that are today out of the government control (or, perhaps, under?). IMF only cares about the net reserves, meaning that National Bank has to buy currency in the market inctead of containing the exchange rate with interventions, temporarily closing the deficit gaps. The government has no understanding on either how to improve the life of a regular Ukrainian, or on how to develop our own national production. And this is sad.

But we will continue offering the government the results of our work that are based on the international exerience and serious work of many experts. We have to keep going and transform our country into a better one, step by step.

Made on