Recently, Ukrainian government officials received a long-awaited announcement from the World Bank: the World Bank has provided Kyiv with a $500 million loan to implement financial sector reform. This is part of the organization's overall $3,5 billion aid package to Ukraine, announced back in March of this year and planned to be disbursed by the end of this year. A further tranche, roughly similar to the first, is planned for the financial sector rehabilitation project.
The Ukrainian government had already secured a World Bank loan for similar purposes in 2009, for $400 million, with terms including a five-year grace period. Ironically, it was after this grace period ended that Ukraine's banking system entered another crisis, and the government decided to seek another loan for financial recovery.
Unfortunately, the Ukrainian banking system failed to draw sufficient lessons from the 2008–2009 crisis. Lulled by the relatively rapid cessation of deposit outflows, many financial institutions failed to fundamentally rethink their business practices, remaining, in essence, financial pyramids that functioned as "deposit vacuums" for their owners. Naturally, they proved "completely unprepared" for a new round of financial and economic crisis—for most of these institutions, the crisis has already proven, or will prove, fatal.
Bankers typically blame their problems on panic among their clients. However, the experience of many market players shows that financial institutions most often suffer from their own owners, who "take out" the bank long before depositors arrive.
A recent example: the regulator has declared Terra Bank yet another insolvent "patient." The financial institution, which began operating in 1995 as Kryvyi Rih's Invest-Kryvbas Bank, has grown into a universal institution with branches in most regional centers. The online publication FinMaidan tracked the key stages and milestones of this growth in a special journalistic investigation. According to the publication, after Terra Bank's latest sale in 2012, the new owner, the owner of the Metal Union group, Ruslan Tsyplakov Terra Bank began actively "pumping out" the bank—in 2012, its loan portfolio increased by 42% (from UAH 1,14 billion to UAH 1,62 billion), and in the following year, it grew by another 40% (to UAH 2,3 billion). Moreover, virtually all loans were still provided to corporate clients. The bank's main resource base remained individuals—the deposit portfolio grew by 35%. At the end of 2013, the institution was sold again for $40 million. According to one version, Maxim Lutsky, the bank's new owner, paid for its purchase by taking out a loan from Terra Bank itself.
With the arrival of the new owner, according to the investigation, the bank's "pumping" continued—the institution continued issuing corporate loans, despite obvious liquidity problems, attracting deposits at exorbitant 26,5% interest rates, and the fact that by the time the temporary administration was appointed, the debt of the 20 largest borrowers had already reached almost 2,1 billion hryvnias. In essence, loans were issued "for the insiders" using ordinary depositors' money; many of the recipients were even registered at the same address.
There are many more interesting details in this story, which can be found in detail in the aforementioned FinMaidan publication, but the main conclusion is clear: Terra Bank was destroyed by an owner who brazenly profited from depositors. This example is not isolated and is quite telling. Very often, the Deposit Guarantee Fund, when "taking over" a troubled institution, takes over a shell bank that has already been drained of all its assets. Moreover, this is often preceded by refinancing from the regulator... Therefore, the question of what the NBU's banking supervision was doing and what responsibility its officials bear as a result remains rhetorical, in keeping with the "best Ukrainian traditions."
Will a World Bank loan solve these problems, and why didn't the previous financial sector rehabilitation program, even partially address them? Back then, Kyiv pledged to redirect banks' available resources toward financing the real economy and expand the range of lending instruments. Other topics included the final restructuring of recapitalized financial institutions, ensuring all banks comply with the 10% capital adequacy ratio, reorganizing non-systemic entities, supporting the Deposit Guarantee Fund, introducing consolidated supervision, and disclosing information about the banks' ultimate owners.
Some of the plans were implemented (in particular, a reform to strengthen the operational, financial, and regulatory capacity of the Deposit Guarantee Fund, albeit incompletely implemented, took place). But none of this solved the core problem—the unscrupulous owner. And making their names and surnames public (and those of the true beneficiaries, not front men) is one of the key challenges for the banking regulator on the path to restoring trust in the banking system. Officials, in words, traditionally take this matter very seriously.
In particular, the Ukrainian authorities' commitment to "announce the full list" of owners was made to the World Bank precisely during the implementation of the previous financial sector rehabilitation project. In fact, most of the measures taken in 2009–2010 amounted to addressing external symptoms and merely "curing" existing problems, without any preventative component. The owners of problem banks (as, in most cases, their managers) bear no real responsibility for their actions (how many criminal cases and guilty verdicts can one recall?). Impunity also gives free rein to other market participants. Although even such a "mere trifle" as banning top managers of banks with a share of problem assets exceeding 20% from holding management positions in the banking sector could have significantly increased their "good faith," to say nothing of criminal liability.
Just recently, NBU Governor Valeria Gontareva assured a roundtable of experts, bankers, and journalists that the implementation of the provision on disclosing information on the ultimate beneficiaries of financial institutions before the end of the current year is certain.
Meanwhile, the banking system's deficit in the first seven months of this year (the latest available NBU statistics) amounted to UAH 2 billion. Losses at banks classified as insolvent and placed under temporary administration amounted to UAH 5,2 billion. Today, there are 17 officially declared insolvent banks in the country, and a total of 24 problematic institutions are on the list of liquidated or administered by the Deposit Guarantee Fund. Many of the problematic banks are associated with Yanukovych-era MPs and businessmen, but reducing the 2014 banking crisis to a purely political factor is unwise. The problem is much deeper and more systemic.
It's quite possible that if all the requirements of the 2009 World Bank project had been met (and not just formally), many of today's problems could have been avoided. "The NBU's policy is still far from ideal. Non-payment risks are very high, and the cost of deposits is almost record-breaking. Moreover, non-payment risks are not controlled at the state level, and investment is constrained by colossal political risks," comments Alexander Zholud, economist at the International Center for Prospective Studies. According to him, the adequacy of the NBU's policy is short-term and poses long-term risks. "Of course, banks' immediate opportunities are increasing, but the risks, on the contrary, are growing, especially considering that the banking system has not yet resolved all the problems of the 2008-2009 crisis," the expert notes.
The sweet pill in this situation should probably be the NBU governor's assurance that the UAH 15 billion agreed upon with the IMF for budgetary (i.e., taxpayer-funded) recapitalization should be sufficient. But whether this money, along with tranches from the World Bank and other financial institutions, will be enough to finally bring about a genuine recovery in the banking system remains a big question.
Andrey Alekseev, The mirror of the week. Ukraine
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