The presidential decree titled Steps on Strengthening the Banking System of Ukraine speaks about the creation of independent service of banking supervision, and the Cabinet of Ministers is called upon to develop the program for 2001-2003 on the increase of concentration of banking capital by “uniting and joining the commercial banks, creating bank holding companies. This means there will be fewer banks as controlled entities and more controlling structures. The supporters of independent banking supervision usually refer to the EC countries: there banking supervision is independent and it is not directly subordinated to the central bank. Let us attempt to find out what this is like this in reality.
In France the structures that carry out the supervision over the banking activity function under the oversight of the Bank of France and the Ministry of Finance, i.e. their independence is relative. And in Germany the independent Federal Department on Credit Issues has been completely eliminated, and all its authority has been transferred to the Federal Bank. Currently in the FRG a wide discussion is underway on the number and scope of authorities on bank supervision to be transferred to the Federal Bank. Perhaps in our country an independent body of banking supervision is also being created only for the purpose of its later liquidation or being joined to the NBU?
The USA can serve as an example of a truly independent banking supervision. But there (this is connected with the specifics of banking legislation, namely the limitation of capital concentration and the support of competition at the financial market) a number of small banks have been preserved. This was precisely what promoted the shaping in the USA for more than one decade a banking supervision system represented by the Federal Insurance Corporation (founded in 1933 — Ed.) reporting to Congress (actually, FDIC directors are appointed by the President, two to six year terms, while the Comptroller of the Currency is an ex officio member — Ed.). That is, more banks were appearing (it was actually set up because banks were failing during the Great Depression — Ed.) and, as a consequence, the independent system of banking supervision was created. Meanwhile, in Ukraine everything is quite the opposite: the number of banks is to decrease, in which connection we are introducing the new body, an independent committee of bank supervision. At this it is not clear what it will report to: directly to Ministry of Finance or to the Cabinet of Ministers. If we follow the American analogy, it is to be subordinated directly to Verkhovna Rada (sorry, but here our learned author is just plain wrong: the FDIC and Federal Reserve are independent agencies within the executive branch — Ed.). But will it then have the right of legislative initiative or will it be limited only to oversight?
Thus far we can anticipate what will happen after the creation of this oversight body. Budget expenses will immediately rise as it will require office premises in Kyiv and the regions, equipment, transport, etc. Also to be paid will be the salaries of new comptrollers involving considerable funds, for it will be necessary to attract high level professionals. Incidentally, according to information from unofficial sources, specialists of the Department of Prudential Oversight (What? Cautious supervision? Official Ukraine’s genius for bureaucratese never ceases to amaze — Ed.) of the NBU that presently carries out bank supervision are in no hurry at all to make the transition to a new oversight body. Maybe this can be treated as follows: today a new structure is created, tomorrow it will be abolished, and the NBU is eternal.
It is also unlikely that the expenses for the NBU will be reduced after taking bank oversight from its competence, since nobody is going to deprive the National Bank of the function of overseeing the observation of banking legislation. Consequently, the NBU will have to create a certain inspection subdivision, and instead of one body that controls banks we shall get two, in practice duplicating each other.
But this is not the end of it either. According to the new bill On Banks and Banking Activity the NBU will get broad authorities to audit all bank founders and shareholders. Consequently, the new body, having inherited all the supervisory authorities of the NBU, can turn their attention to large-scale entrepreneurs and firms.
Who benefits from the creation of banking supervision outside the NBU? Those who want to bridle all the financially intractable bankers and major shareholders with their benefaction. In addition, it will be easier to eliminate competitors on the banking services market. The NBU itself, which has its own position on how to solve bank problems, will also have its own problems. As a result, a useful weapon appears for use in the competitive battle on the financial market, since while the services of bank supervision remain with the NBU, it is very inconvenient to manage them over the head of its governor.
Without doubt, bank supervision needs crucial restructuring along with a review of its functions and degree of its responsibility. But the creation of independent bank supervision in the immediate future will not improve but on the contrary aggravate the situation on the financial market. Obviously, neither the banks themselves, their depositors and shareholders, nor the economy of Ukraine will benefit from it.
