This country’s financial sector has been at fever pitch in the past six months. The National Bank has only managed to slow down the mass-scale outflow of individual and corporate deposits by using “heavy artillery,” i.e., by declaring a moratorium on the early withdrawal of money from bank accounts. The national regulator and parliament have made one more financially important decision: to increase the guaranteed ceiling of individual bank deposits from 50,000 to 150,000 hryvnias. But this proved insufficient for the disturbed minds of Ukrainians.
The Day has asked Valerii HEIETS, academician of the National Academy of Sciences of Ukraine, director of the Institute of Economics and Forecasting, about how Ukrainians’ confidence in banking can be restored and what should be done with problem banks.
A Research & Branding Group poll showed that more than 70 percent of Ukrainians do not trust banks. What methods and measures do you think can help restore the lost confidence?
“You are right in saying that the main question today is to restore public trust because further development of the entire economic system depends on this. I would single out two components in Ukrainians’ mistrust of the banks. The first is the political crisis and the fact that the government has been emphasizing politics, rather than economics, in its economic policy since 2004.
“The second one is about the activities of the banking and financial institutions themselves, where there are in turn two subitems. The first subitem is the stability of the banking system, which is still showing deposit outflow (in both hryvnias and hard currency). The solution of this problem depends on how well the national regulator, i.e., the National Bank, performs its functions.
“The second subitem is the relationship between the banks and the populace. It is clear that financial institutions issued credits to the populace, and now that the economy is destabilized they and their clients are mostly at the receiving end, for it is more and more onerous to repay hard-currency loans. Obviously, nobody can avoid losses. But banks can always work in a more organized way with the populace. If there is an attempt to play a one-side game because clients are less organized and legally incompetent, this creates a situation when banks are trying to shift all their expenses onto the borrowers. In this case one should find a mechanism to avoid conflict situations. I have outlined just a small range of problems, but their solution will restore the confidence of depositors in banks.
“Furthermore, it is important that the National Bank and the government work in a system that will make it possible to forecast the development of economic events. But if banks are not sure that the situation is predictable, they begin to be feverish. Seeing this, individuals withdraw their money and try to convert it into hard currency. After this it is just illogical to speak of any confidence in the financial system.”
Obviously, it is difficult now to stop the deposit outflow with market-style methods. What administrative measures can the NBU take in the nearest future to hold back individual savings?
“It has already applied some administrative-style measures, such as banning the early withdrawal of deposits and introducing interim administrations in banks. At the very beginning of the crisis, the NBU should have forbidden subsidiary banks and other private banks that are operating in Ukraine from moving the funds allocated for refinancing to the currency market, converting them, and then taking them out of the country. The principle should be as follows: if all were making money before the crisis together, all should bail out the banking system together.”
Is it still not too late to introduce this restriction, for those in the know have already taken their money abroad?
“It is really too late in some respects but it is not so in some other. The situation is still under control today. The NBU should aim all its actions at ensuring as complete a money circulation as possible. If this requires administrative measures, the National Bank should take them and control their fulfillment without looking back on anybody.”
After the collapse of the USSR Savings Bank, public trust in state-run banks dropped to 5–7 percent. Later, depositors showed confidence in commercial banks. Now that individuals are disappointed with commercial banks, how likely are they to turn to state-run banks?
“The situation in the 1990s and today are totally different. There was a different attitude to private business at the time: ideologists and propagandists were trying to persuade us that such things as private sector and market economy will be able to solve any problems. But there have been so many changes in the past 15 years. If you look up the results of serious sociological surveys, you will see that today the populace is very much distrustful of not only banks but also other private institutions. Very many people would not even work for a private owner for a number of reasons, such as politics, pay, working conditions, etc.
“In reality, the question is different: the NBU and the government should see to it that there is a competitive environment in the banking system. A competitive environment does not necessarily mean private banks. Subsidiary banks with a share of foreign capital and private banks are entirely different systems of financial institutions that have their own set of approaches. In my view, the banking sector should consist of three approximately equal groups of banks: state-owned, subsidiary with a share of foreign capital, and private ones. Then each of these groups will be performing its functions and trying to obtain a certain share of banking services in its own segment of the market.”
In other words, you expect that after the crisis state-run banks will account for 30 percent of the banking market?
“I would like to see three equally-sized groups of banks that differ in their ownership forms to work on the financial market after the crisis. Let them work and compete by offering the cheapest and the highest-quality services to individuals and businesses.”
Will the state be able to manage its banks effectively?
“It will have to, for it will be working on a competitive market, and either its management will ensure effective performance and transparency or it will be making losses all the time.
“Undoubtedly, the state will be always present in the economy. Today, budgetary investments in the Ukrainian economy account for only two percent of the GDP, while in the developed European economies it is four to five percent of the GDP and they manage to cope with this problem. They also have state-run banks which play the role of creditors for individuals and businesses. In other words, a state-run bank does not mean an ineffective bank.
“Besides, state-run banks can be an instrument for implementing target-oriented programs, which the government carries out one way or another. One more point: by owing a number of banks, the government insures itself against possible quandaries. Imagine, for example, that the very difficult current financial situation in European countries will force the Austrian, German, and Italian banks to withdraw all the money from their Ukrainian branches. Who will then be offering banking services in Ukraine? This is why the state should always have a guaranteed segment of the banking market because there have always been and will be crises. And it is our duty to insure us against crises.”
If I understood you rightly, you support the idea of problem banks being bought out by our state, not by foreign banks?
“The state should control a part of the banking market or act as a businessman: you can buy a part of the problem banks today at a low price, stabilize them, and when the crisis is over, sell them on the market at a much higher price. The state will derive a benefit today from buying the best assets instead of selling them cheaply to foreigners.”
To stabilize the economic situation, this country should take out loans, but the IMF is not exactly rushing to make the second standby installment available. With this in view, what are the most realistic conditions for Ukraine to get loans from other countries?
“I bet the IMF will give Ukraine a loan. In reality, it is interested in issuing the second tranche. Why? Because Ukraine, with a population of 47 million, is much larger than Poland or any other European country. If, God forbid, we encounter a serious economic destabilization (something no one is interested in), all our neighbors will be in a mess. After all, negotiators will reach an agreement. When the IMF grants the loan, other countries will follow suit.”
