Bank workers note that one of the most controversial events of the past couple of months was the National Bank of Ukraine’s decision No.273 about cutting banks’ requirements on minimal regulatory capital up to 120 million hryvnias and the license requirements up to 120-240 million hryvnias. On September 13 the Association of Ukrainian Banks (AUB) together with a group of commercial banks even filed a primary allegation to the District Administrative Court in Kyiv to declare certain articles of the abovementioned decision of the NBU illegal and invalid. The document disturbed the banking sector because it was a first step towards a global transformation of the national banking system, and the elimination of the fourth group of banks in the NBU’s classification. Once again we find ourselves in a situation where business is threatened by regulatory bodies. Moreover, the regulator is not inclined to listen to arguments and react to proposals. We asked Oleksandr SuhoniakO, president of the AUB, to comment on the actions of NBU.
Mr. Suhoniako, the NBU is determined to use the banking sector to revive economic growth. It also believes that capital accumulation will allow banks to resume crediting, and will stimulate their competitiveness and reliability. Do you agree?
“It is hard to disagree with an absolutely sensible statement. However, it is impossible to accept the situation when negative intentions are hidden behind nice phrases. The banking system is a mirror of the economy, and the level of banks’ development should correspond to the state of a country’s productive forces. That’s the way it works. Otherwise we are putting the cart before the horse. The volume of banks’ capital is not a panacea or an axiom to secure the economy’s revival on its own. It is only a tool used for this revival, and but one of many necessary components. It is much more important today to restore the trust of domestic investors (incidentally, also in the NBU’s policy), trust in the hryvnia, protect investors’ and creditors’ rights, and restore the judicial activity of our courts. Incidentally, the NBU has not addressed most of these problems in the past several years. Returning to the main topic of the question, did capital size save such banks as Nadra and Ukrprombank? Their capital was much bigger than the minimum regulatory capital. Recall the examples of the US, England, and other leading countries: the crisis struck financial institutions that had dozens of billions of dollars/euros. The banks in the fourth group, against which the NBU’s actions are directed now, did not generate a single systemic threat during the crisis. None. On the contrary, they continued to effectively fulfill their functions, crediting and servicing small and medium business that the government cares so much about and whose development is a priority for the state’s policy for the next couple of years. The president of Ukraine also understands this, because in his electoral program he emphasized the need to support the development of small business. Of course, these banks will not realize large-scale programs of crediting imported household appliances and cars. However, this may be for the better. One thing can be said with certainty: these banks have not and will not pose any systemic threats to the national banking system. Meanwhile, their role is hard to overestimate, just like the role of small vessels in a human body. Without the proper functioning of these vessels any organism will face necrosis. Unfortunately, the NBU does not or is not able to hear both our calls and the position of international financial institutions, in particular, the IMF.
“Meanwhile, we are talking about simple things: only qualitative, rather than quantitative, indices can be an objective yardstick with which to measure this or that financial institution. It is necessary to control such indices as adequacy of capital, which is, incidentally, indicative of a particular bank’s ability to credit the economy — something the NBU is deeply concerned about. Administrative pressure has never led to an efficient development of any sector of the economy. However, it seems that real issues regarding the reliability and efficiency of the banking system are not the real motive behind the most recent actions on the part of the NBU. The motive is somewhere else.”
The NBU emphasizes that the regulatory capital of the acting banks has to be bigger than the minimum requirements set for the authorized capital of a newly created bank (75 million hryvnias) and believes that it would be corect to set the minimum regulatory capital at 120 million hryvnias. Could you please comment on this approach?
“It is true that under normal economic conditions a bank’s regulatory capital should exceed its authorized capital. This is an axiom for efficient operation.
“However, it is known that in crisis conditions this cannot always be secured, and these problems concern both small and large banks. Following the results of an analysis of NBU-provided data from July 7, 2010, banks with the balance capital (excluding subordinated debentures) that was lower than their authorized capital made up 40 percent of the total number in groups I and II, 20 percent in group III, and 15 percent in group IV. It appears that in this regard small banks are doing better than average.
“The AUB emphasizes that the minimum start capital requirements for banks in Ukraine are higher than in European countries, which are much more powerful financially.
“Regarding the existing banks that do not have five million euros, that same European Banking Directive envisages a possibility of prolonging their operation if they gradually increase their capital. We see that some countries indeed take care of keeping all efficiently operating market players regardless of their size.
“Regarding minimum regulatory capital condition of having precisely 120 million hryvnias, the NBU did not actually provide any justification of why it believes that the regulatory has to exceed the minimum authorized capital precisely by 45 million hryvnias. What is the economic sense of this sum and what sense does the minimum regulatory capital have, if having this much capital is not indicative of anything in the case of large banks? A bank can have a capital of 120 million hryvnias but its adequacy may be two to five percent — so does it make it competitive or reliable?”
The NBU concluded that insufficient and inadequate corporate management caused the insolvency of a large number of banks during the crisis. In order to support problem banks, the NBU was forced to provide significant refinancing. In many banks temporary administrations were introduced, and some of these banks later saw their licenses revoked. Could it be that the minimum requirements set for the capital of small banks should indeed be raised in order to prevent the squandering of state funds?
“In fact, this position of the NBU is a classical case of confusing consequences and causes. What caused the crisis? Was it the level of capital in the banking system? On the contrary, it was growing before the crisis struck at a higher rate than in any other segment of the financial market. Even in crisis conditions banks from the IV group managed, as of July 1, 2010, to secure an 18-percent capital growth as compared to the onset of the crisis. So what are the real causes behind the crisis of the banking sector? Now even freshmen know the answer. In Ukraine the effect of the world crisis was multiplied by the inefficient structure of the economy, political instability, and inadequate actions by the government, which declared that it would not permit the crisis to affect Ukraine and would shut the door in its face. It failed. The banks were hit by the crisis first and experienced a colossal outflow of deposits, previously made by both natural persons and legal entities, and a precipitous fall in the quality of currency credit portfolios caused by the plummeting national currency — all of this together catastrophically undermined the liquidity of the banking system. Lower capital sizes were a consequence rather than the cause of the crisis in these conditions.
“Regarding the accusations that small banks did not manage their credits properly, this is also false. Banks in groups I-III had higher reserves for credit operations (18 percent) than banks in group IV (12 percent).
“There are many speculations now about NBU refinancing. However, banks in group IV used this type of liquidity support to the smallest degree. The AUB’s calculations show that the banks’ funds (including NBU refinancing money) made up 20-26 percent in the liabilities of group IV banks last year. Meanwhile, this index fluctuated between 35 and 44 percent for banks in groups I-III. No other types of state support were provided to group IV banks, while 17 billion hryvnias were taken from the state budget to recapitalize three large banks. The issue of finalizing payments to the depositors of Ukrprombank and Nadra bank has not been resolved until now.
“In conclusion, one thing is evident. Now is the time to draw conclusions about the first wave of the crisis. The NBU is also trying to do this. However, this can be done in different ways. One can realize a comprehensive program to defend the rights of creditors, depositors, and investors. One can create a transparent refinancing system and improve the bank oversight system. One can put in order the taxation and reserve system and facilitate the emergence of new financial instruments. On the other hand, one can make a formal move and raise the size of regulatory capital for a certain group of banks. Does everyone bite off as much as he can chew?”
What is your attitude to the world trends towards increased oversight and regulation of banking activities?
“The AUB has always supported the need to improve the normative and legal acts regulating banking activities and to bring them in line with the new regulations proposed by the Basel Committee on Banking Supervision. However, the drafting of such acts has to be transparent, involve consultations with banks, and be based on market conditions — with equal competitive conditions for all banks. At the same time, I have to note once again that the attention of the world’s leading economies is currently focused on enhanced regulation of global financial institutions, which were the greatest threat to the financial stability of those countries during the crisis. In many countries there is an ongoing discussion, and regulatory acts are being adopted to restrict the activities of financial institutions, split them up and make them smaller.
“The NBU has to step up its oversight in the entire banking system rather than in one of its particular segments. Regulatory conditions have to be common for all market participants, while banking supervision has to be carried out exclusively on an individual basis. Only in this case can we speak about an effective regulatory role of the state. However, enhanced supervision is not tantamount to enhanced bureaucratic pressure on banks.
“Unfortunately, in Ukraine we see a deformed approach to the principle of bank supervision when artificial methods, justified by subjective factors, are used to attempt an obscure transformation of the existing architecture of the banking system. The consequences of such policy cannot be foreseen, and they will definitely miss the goal declared by the NBU. They will be counterproductive.”
The NBU notes that capitalization procedures have been simplified and assures that banks are able to meet the new demands in the set terms. Do you agree with this?
“The essence of the problem is not in instruments but in the economic appropriateness and economic grounds for these mandatory procedures or others.
“First, many group IV banks do feel any economic necessity to increase their capital. They more than satisfy the adequacy requirement. Second, the crisis is not over, neither in Ukraine nor in the world. Our economy is experiencing a chronic deficit of floating assets. Now there are simply no extra investment resources to fulfill bureaucratic demands for small banks to increase their capital. And now the NBU imposes on them a regulation limiting their activities aimed at attracting deposits by natural persons, which prohibits them from expanding crediting transactions and receiving revenue in order to increase capital on their own. Its absurd.
“Moreover, in order to continue making deposit transactions, 69 banks had to increase their capital to 120 million hryvnias within a week. Even under simplified conditions this is impossible to fulfill.
“For the sake of objectivity let me note that during the crisis the NBU somewhat simplified capitalization procedures for banks. In doing so it took into account, among other things, a number of proposals put forward by the AUB.”
Do you agree that deposits in a small bank are less risky than in a large one?
“The banking system is very vulnerable because of a large number of myths and stereotypes about it. Among these myths is a statement about the greater reliability of large banks. Incidentally, there is also a myth about the greater reliability of banks with foreign capital as compared to national banks. Each of these statements relies on a subjective opinion or even a purposefully created illusion. In fact there are only two categories of banks: reliable and risky. A large or a small bank can find itself in either of these two categories. This is also true of banks with foreign capital and national banks. There is an entire array of methods, indices, types of technical analysis, etc. to determine banks’ reliability. In any case investing in banks involves a certain threshold of risk but also an established level of reimbursement through a deposit guarantee fund.
“What I have said is confirmed by the most recent crisis, when depositors of Ukrprombank, Nadra, and Rodovid found it much more difficult to get their money back than the depositors of the group IV banks — these people received payments from the fund guaranteeing deposits made by natural persons.
“Economic calculations also show that capital-to-deposits of natural persons ratio is 70 percent for group IV banks (as of July 1, 2010), which is higher than for banks in groups I and II (47-49 percent) and in group III (67 percent). That is to say, the statement that group IV banks have insufficient capital to cover the risks of untimely return of deposits is false. Let me once again return to what I already said: supervision has to be tough but carried out individually towards each bank, regardless of its size.”
Finally, what is the NBU policy you would like to see in the area of bank regulation?
“The latest statistical research shows that Ukraine’s banking system is excessively concentrated. This is due to, among other things, the NBU’s administrative targeted actions. Officials keep saying how many banks Ukraine should have. How many banks should we have — 50 or 100? Let us leave this numerology to other specialists. There should be as many banks in Ukraine as is needed by its economy and society. It can be hundreds of banks, as is the case in Russia, or thousands, as in the US or Germany. The main thing is that each segment of society would find its banking services market: large, medium, and small business; importers and exporters; farmers, cooperative societies, and metallurgists. Another important thing is that each segment of the banking system would develop in a market environment without artificial shackles (they won’t run away, don’t worry).
“In its efforts to limit the number of market players the NBU concentrates financial risks in several dozens of banks. In fact, it is increasing both the likelihood that crisis phenomena will reoccur in the future and their scale and sociopolitical consequences will be even greater, which will also affect the powers that be. Understandably, deconcentration of risks and a wide spectrum of market participants requires high professionalism and significant efforts on the part of the national banks. Let us hope that there will be professionals in our country that will create, rather than ruin, the national banking system.”
