At first glance, nothing, or almost nothing, special is happening today in Ukraine’s banking system. Under the surface, however, that’s not the case. Late last week Kyiv saw the presentation of a joint study conducted by the Ukrainian Financial Initiatives Agency (FIA) and Standard & Poor’s as part of the USAID Capital Markets Project (CMP). The authors analyzed and assessed the Ukrainian banks’ information transparency in 2010. This interesting report highlights the diminished transparency against the backdrop of financial difficulties and an imperfect structure of information disclosure. The authors note that a deteriorating situation has been noted for the first time in the past five years. It is also the first time that leading banks show results that are worse than the ones they showed the previous year. The average index of ten banks has dropped from 61.3 to 54.9.
Alexander Pavlov, Senior Banker at the Financial Institutions Projects, Ukraine local office of the European Bank for Reconstruction and Development, offers quite a simple explanation for this phenomenon. He told The Day’s Natalia Bilousova that banks do not want to open up because they see no point in doing so now. Earlier, the transparency index was on the rise because many banks wished to “sell themselves” and improve their image. But now it is not their No.1 task. The index will begin rising after the banking system resumes normal work and shows interest in foreign markets. The banker is sure that this will happen next year, although banks are already mapping out a new strategy of working on a post-crisis market, when they will have to show investors publicity and openness.
Yet, Oleksii Kutsenko, a FIA expert, and Svitlana Borodina, director of Standard & Poor’s corporate governance ranking service, told The Day during the abovementioned presentation, that transparency and creditworthiness are absolutely different things. It was also pointed out that state-run banks show better information disclosure than private ones do. However, in Borodina’s opinion, “it is easy to say that the state is my chief investor: it is neither difficult nor dangerous. But to say that Mr. Ivanov owns, say, 35 percent of the shares, which means such and such amount of money, is to create a real danger for Ivanov.”
Yet it is bank depositors who remain in constant and real danger. And while earlier it was considered that those who have confided in private financial institutions run the greatest risks, now the danger is also hanging over those who have trusted the state. Incidentally, only one state-run bank, Ukreximbank, is among the top ten most transparent banks in this country. So, what are the rest, including Oshchadbank, one of Ukraine’s largest banks, as well as Rodovid Bank, Kyiv, and Ukrgazbank, hiding? During the credit crunch they were bailed out at the taxpayer’s expense, which allowed them to remain afloat. It is they that are supposed to be open to taxpayers. Does their silence mean that the country will have to loan them money again?
Unfortunately, this danger is not ruled out. An interdepartmental commission with Vice-Premier Syvkovych as its head recently concluded that governmental, including law-enforcement, bodies, state-run banks, and banks with a major state-owned stake, are taking extremely inadequate measures to repay bailout loans. Meanwhile, press leaks suggest that the abovementioned banks are again turning to the state for help.
But is it not to them that IMF managing director Dominique Strauss-Kahn recently explained that the recapitalization of banks by the state is a one-off measure? He compared it with a river into which you cannot step twice. He says one cannot possibly turn again to parliament for billions to bail out the financial sector. In his opinion, one should seek new ways to solve this problem, such as increasing supervision and levying special taxes, in order to change the banking sector’s risky policies.
National experts also believe it is economically inviable to recapitalize major banks. According to the lawyer Serhii Overkovych, a partner at the Hvozdii and Overkovych Law Firm, the state is, as a rule, an ineffective owner and will be hardly able to get back the funds it spent on bank recapitalization if the banks are going to be sold further on.
In the view of Oleh Malsky, a partner at the AstapovLawyers International Law Group, there is a grave risk that state-run banks will begin making the same mistakes, i.e., issue loans with inadequate collateral or in an excess quantity, gambling on the market. The expert is convinced that it will be extremely difficult for both the country and the state budget to recapitalize banks twice.
Serhii Yaremenko, a well-known banking sector expert, also told The Day about the state-run but rather little-known Development Bank. In the expert’s view, it has no impact whatsoever on the country’s development, but has taken the place of the one that could do this effectively. As to how effectively the previous government refunded the banks, Yaremenko says it was necessary to do so to rescue Ukraine’s overall banking system. Yet, in his words, these funds were spent not only to compensate people for the deposits they lost. “The greater part of the money vanished. Where to? This is anybody’s guess…” What then? The expert thinks one should not turn a blind eye to this situation.
“One should assess the losses and admit the failure,” he says. “There is also a different path: to spend some more. But what shall we achieve by this? We will make these institutions more viable. But will the expenses be justified?” Yaremenko compares state- and quasi-state banks with “a suitcase without a handle”: it is too heavy to carry but you can’t possibly drop it. It is this approach of the state that seems to be slowing down the making of correct decisions. It is also possible that certain financial groups are already eyeing one bank or another, and these totally diverse interests preclude the government from making a crucial decision. “A common approach is, by all accounts, ruled out,” Yaremenko says. “If the state leaves these banks to their fate, their customers will begin demanding that their deposits be reimbursed, while borrowers will stop refunding loans.” Yet the expert believes this will not cause the banking system to collapse. “Nobody is paying attention to these outsiders on the market. They are looked upon as barely surviving cripples,” Yaremenko says.
He is worried about the fact that, after the “new” Constitution has been restored, the National Bank (NBU) is again a subject of legislative initiative. What poses a very grave threat is the NBU’s aspiration to get rid of a number of small and medium banks, as well as the upcoming law on currency regulation, which, according to Yaremenko, is aimed at radically changing the behavior of market players, which may in turn destabilize the financial sector for at least six months. Can we afford this luxury during a crisis?
