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BANKING SYSTEM OF UKRAINE IN THE CONDITIONS OF

FINANCIAL CRISIS

Oleksandr VORONOV
Odessa Regional Institute of Public Administration of National Academy of
Public Administration, Office of the President of Ukraine,
Odessa, Ukraine
vorrronn9@mail.ru
Eduard PLESHKO
Head of Department of the Specialized Prosecutors Office, senior counselor of
justice,
Sergey VORONOV
Student of the Odessa National Economic University
dontwantregatsa@mail.ru

Abstract
Influence of world financial crisis destabilized considerably development of Ukraine.
Especially a crisis affected the Ukrainian banking system which dynamic developed
sufficiently until the second half 2008 years.
A crisis caused the considerable increase of interest rates on credits that resulted in the
decline of the credit rating of banks. The crisis phenomena stipulated instability of
national currency. In September, 2008 falling of course of hryvnia began in relation to
the dollar of the USA, which in October outgrew in panic at the currency market. On
the modern stage of development an economy of Ukraine is in unstable position. It
touches both the banking system and all industries of economy.
One of facilities of localization of financial crisis, coming from world experience, there
is the program of anti crisis actions, which are formed by the representatives of central
bank. The anti crisis measures of the National bank of Ukraine are directed on the
decision of such basic tasks, as providing of stability of national monetary item by the
instruments of percent and currency policy (gold-value backlogs), maintenance of
firmness of the banking system by support of liquidity of separate banks, lead through of
diagnostic inspection of banks in relation to their solvency in the conditions of crisis.
Keywords: financial crisis, banking system, credit, rating of banks, diagnostics of
banks

INTRODUCTION
The analysis of the events of recent years shows, that an extreme mobility
of global finances, isolation of goods and credit operations from real finance
streams and credit risks lead to the world financial crisis, negative consequences
of which affect both developed and developing states. The world financial crisis

affected the economy of Ukraine as well. Its consequences are reinforced by


political instability in the state and crisis occurrences in material production,
financial sphere. Globalization of financial market has lead to that that crisis
occurrences in a separate state (USA) became global.
Globalization processes started from internationalization of production and
goods realization within the borders of Triad Strategy of Europe, America and
Asia in the 60s of the 20 th century. This caused the necessity for search for
sources of financing and instruments for its mobilization, which, in its turn,
stimulated rapid development of bank system. By the level of globalization
financial sphere surpasses all other branches of regional economy. Due to the
modern information technologies, which create prerequisites for modern
financial products appearance and global market development, bank business
with no real borders arises (Hutsal I.S., 2004). For financial crises prevention,
banks stable development security, study of the influence of globalization on
home bank system, special researches gain current importance. In the conditions
of internationalization and globalization processes development banks become
an important financial mediator, as they provide all participants of home and
foreign economic relations with necessary resources, form resources on home
and foreign markets. Thats why negative influence of global crisis, first of all,
reflects on the activities of transnational banks and national bank systems,
integrated into world financial market.
The place and role of banks in the process of globalization were studied by
such native scientists as O. Bregeda, S. Brovkov, A. Veresyuk, A. Goncharuk,
I. Hutsal, B. Hunsky, D. Dyakonova, A. Efimov, O. Ivanitskaya, G. Karpenko,
I. Lutsishin, S. Osavolyuk, Yu. Pahomov, L. Rudenko, I. Shatkovskaya,
B. Shevchik, Yu. Yakusha. In foreign countries these questions were researched
by N. Davis, H.-U. Dering, G.F. Marshal, Mukergy, J. Perar, D. Soros,
G. Riputro, W. Hankel (Dering H.-U., 1999). A considerable contribution to
development of theory and practice of foreign capital functioning in the bank
system of Ukraine was made by A. Haidutsky, L. Patrikats, S. Lipinskaya,
A. Papusha. Works by O. Baranovsky also worth mentioning, as he has
determined the main motives of foreign investors to come into the national bank
sphere (Baranovsky O.I., 2009).
Nowadays the main objective of Ukrainian financial institutions
development is rehabilitation of bank sector, which can give an opportunity to
enliven state economical activity. The main aim of this process is rise of
stability and ability of financial sector to restore itself after some possible
shocks, widening of list and quality improvement of financial services, which
will give financial institutions opportunities for better satisfaction of real
economic needs and needs of economy as a whole. Bank sector is a financial
artery of economy, it reflects financial and economical condition of the state
and is the first one to react on any positive or negative tendency of
development. Full-value services and high profitability of bank institutions
directly depend on financial stability of the economy.

The problem of instability of financial and credit system of Ukraine has its
own peculiarities. Firstly, crisis occurrences are connected to the imperfectness
of state economic development model and common macroeconomic factors.
Secondly, instability of financial sphere is predetermined by the problems of
inner financial policy in the sphere of credit and currency market regulation.
Analysis of reasons for bank crises rise is in need of formation of system
approach to the creation of monitoring and management strategies.
Modern world bank sphere is defined by the growth of bank capital aimed
to provide its stability and universalization. Along with the processes of capital
concentration the number of banks decreases. During 1985 - 1995 total number
of banks in the USA has declined for 18%. Only during the first half of 1990s
the number of banks decreased has decreased in Switzerland for 24%, in France
for 22%, in Germany for 20%, in Spain for 15% (Top 1000 World Banks 07
Published. 02 July, 2007). Such tendencies, on one hand, create a threat of
competition for national banks, but on the other hand, show new ways for their
development on home market and integration into world global processes. The
tendency of the decrease of number of banks develops in Ukraine too. During
1998 2008 the number of banks in Ukraine, according to the register, has
declined for 13%, which is quite a positive tendency, as it provides for fusion
and joining of non-competitive banks and will be favourable for bank capital
increase, financial stability and reliability of bank system.
Ukrainian banking system includes the National Bank of Ukraine and the
corresponding structure of banking institutions. By the beginning of 2012 in the
country there were functioning 176 out of 198 registered banks, including 53
banks with foreign capital (22% of them with 100% foreign capital).
According to the NBU, the share of foreign capital in the equity of the banking
system in 2011 insignificantly increased and was 41.9%. At the beginning of
2012, the gross assets of the banking system have accounted for 92% of
Ukraine's GDP, which indicates a high level of integration of banking
institutions in the economy. Most banks are parties to the international card
systems NSMEP, the development of which the NBU takes an active part in. As
of January 1, 2012 there drew 57.9 million payment cards issued by domestic
banks, of which 60% were active. Infrastructure service of card business has 33
thousand ATMs and 28.8 thousand bank terminals; acquiring network consists
of 94.7 thousand POS terminals. There are 9 bank money transfer systems
(including 2 international systems) functioning in the country. Regional
network of banking institutions has more than 20,000 sales outlets. The greatest
number of banks is concentrated in major industrial regions and the capital. In
the top ten there are eight banks with foreign capital. Total assets of the system
have increased by 1% (up to 1012 bln. hryvnas).
As a result of the global financial and economic crisis the Ukrainian
banking sector experienced a decrease in activity of banks, a significant
decrease in the resource base, the increase in weight in the portfolio of bad
loans, bank losses. National Bank of Ukraine had introduced a temporary

administration in 25 banks, and 13 more banks had had their licenses been
revoked and had initiated liquidation proceedings. To some extent, the trust of
Ukrainians in the banking system and the national currency was undermined.
Outflows originated. There was an acute shortage of resources in the banks and
the economy as a whole. Inadequate capitalization makes competitiveness of
Ukrainian banks in the international market impossible. Domestic financial
resources are dispersed among a large number of small banks. In the domestic
banking system, 11% of banks have assets that exceed 10 bln. hryvnias, 6%
more than 5 bln. hryvnias, 26% more than 1 bln. hryvnias and the largest
portion (57%) of the banks has assets amounting to less than 1 bln. hryvnias.
Rating capitalization of the banking sector in Eastern and Central Europe
for the sum of net assets clearly shows the expansion of foreign bank capital.
The largest foreign presence is in the banking assets in the Czech Republic
(96%), Slovakia (96%), Estonia (97%), Lithuania (96%) and Hungary (83%)
(Capitalization of Economy: Problems and Prospects, 2006). In Ukraine, the
share of foreign banks in total banking assets does not even reach 10%. Active
involvement of foreign capital in Ukrainian banking sector is observed since
2005. From 2005 to 2009 the number of foreign banks almost tripled (from 19
to 53), while the share of foreign capital in the domestic banking system capital
respectively increased almost four-fold (from 9.6 to 36.7%). The first
manifestations of the financial crisis in the U.S. in early 2007 have caused a
decrease in the volume of international financial flows, which has led to a
decrease in attracting credit resources from foreign markets by Ukrainian banks.
Ukrainian banking system for the first time faced with the negative impact of
financial globalization: firstly, lack of cheap foreign resources has led to greater
use of internal, more expensive, resources and this in turn caused a rise in
deposit interest rates, and secondly, foreign banks, who worked in Ukraine in
the event of liquidity problems of national banks began to sell their temporarily
free resources on the domestic interbank market, which greatly increased the
interest rates on interbank loans (Suprunova I.V., 2008).
Nowadays almost all the major European financial groups are present in
the domestic market. Hungarian OTP Bank (after the acquisition of
Raiffeisenbank Ukraine), French BNP Paribas (Ukrsib Bank), Swedish SEB
(bank Agio), Dutch TBIF Financial Services Group NV (VA Bank), Russian
Renaissance capital (Bank Leader), Bank of Moscow, VTB and UXO
(opened subsidiary banks, VTB and, in addition, the bank bought the Dream)
have materialized their interest in Ukraine. At the same time, an agreement
regarding the acquisition of Ukrsots Bank by the Italian Banka Intesa is not
fully implemented. Practical interest to the domestic banks have shown, also,
the Austrian Erste Bank (Bank Prestige), Czech PPF Group (Agrobank,
Privatinvestbank), Greek EFG Eurobank Ergasias (Universal), Russian
Private Standard (AIS-Bank). French financial group Credit Agri-cole, which
already owned the bank Calyon, has acquired Index-Bank. The share of
foreign capital in the domestic banking market is measured with the part of the

banks capital in the total number of banks in Ukraine, as well as their


participation in the assets (Key performance indicators of Ukrainian banks,
2008). The main methods of penetration of foreign capital in Ukrainian banking
sector are: the establishment of a branch or subsidiary, the acquisition of
existing local bank in the privatization or bankruptcy; portfolio investment in
current local bank and gradually increase equity participation up to full control,
merger or acquisition of another foreign bank, which owns a branch or
subsidiary in that country. During 2006 2008 resulting from the purchase and
sale foreign banks gained control over a number of domestic banks in Ukraine.
Foreign banks are more competitive and own registered capital, which is several
times greater than the total authorized capital of operating banks in Ukraine. For
example, the authorized capital of the largest bank in the world Bank of
America Corp. (USA) is 91,065 million dollars, and exceeds the authorized
capital of banks operating in Ukraine, which is equal to 8,489.70 million
dollars, more than 10 times. In many cases, the objectives of banking systems
that are foreign-owned, are very difficult to reconcile with the national
objectives of Ukraine. These banks are not sensitive to any instruments of
monetary policy, nor, especially, to other state measures that may be a threat to
the financial security of the state (see table).
This situation confirms the need for a balanced state policy regarding the
liberalization of access to the Ukrainian financial market. Not regulated access
of foreign bank capital could lead to less competition and market capitalization
of domestic banks, reduce the effectiveness of banking supervision, which
would entail negative consequences for the economy as a whole, and for the
financial market, in particular. One promising direction for the capitalization of
small banks is their reorganization. However, the process of concentration by
absorbing small unstable banks by large banks or selection of unprofitable
branches of large unstable banks cant be called a real concentration of banking
capital in Ukraine (Shatkovskaya I.B., 2003).
This reorganization leads to the destruction of regional banks, which are
converted into branches of big banks. Real, economically viable and socially
stable would be the creation of interbank associations, provided for by the Law
of Ukraine On Banks and Banking Activity (Law of Ukraine On Banks and
Banking Activity, 2000). Growth of banks capitalization is essential to the
development and strengthening of the banking system and its integration into
the global banking system. Another one of the strategic objectives of the
domestic banking sector is increasing its investment activity. Indicators of
banks investment in securities are low in Ukraine, indicating that the
reorientation of the major banks in active operations. Grounded and optimal
allocation of financial resources during the implementation of investment
operations is one of the most important principles of financial stability,
solvency and liquidity of banks.

Table 1. Positive and Negative Factors of Foreign Capital in Bank Sector of


Ukraine
Positive Factors

Use of international banking


experience
Improving the quality and expansion
of banking services

Direct use of modern banking


technology and experience of bank
management
Reducing the impact of internal crises
on the stability of the banking system

Improving the competitiveness of


domestic banks
Reduction of the bank loans and
greater availability to them
Increasing the financial rating of
Ukraine in the international market

Negative Factors

Increasing dependence of the banking


sector from fluctuation of the world
financial markets
Possibility of penetration to the
Ukrainian market not only powerful
banking systems, but also banks with
low ratings and sufficient volume of
capital
Possibility of foreign control
strengthening over the banking system
of Ukraine, which threatens the
national and state economic security.
Probability to concentrate the
activities of banks with foreign
investments on the most profitable
operations
The threat of loss the economic
sovereignty
Probability of elimination of domestic
banks, which did not survive the
competition
Increasing the probability of outflow
of Ukrainian capital abroad

Source: ..
. : http://mevhnu.at.ua/load/studentska_naukovo_praktichna_konferencija

Destructive tendencies of banks investment activities were caused by


negative investment climate, instability of the economy, political situation and
socio-economic climate in the country, legislative weaknesses. According to the
World Economic Forum in 2001 in terms of competitiveness of the national
economy, Ukraine took the 69 th place among 75 countries surveyed. Lower
level of competitiveness of the economy had only countries such as Honduras,
Bangladesh, Paraguay, Nicaragua, Nigeria and Zimbabwe (Starovoit K.I.,
2005). The industrial sector is experiencing not the best times as well,
investment which is one of the most important moments in the investment
policy. In particular, 48% of industrial enterprises in Ukraine are unprofitable,
including 10% of them - not working. With the formation of advanced and

flexible enough banking system, build a proper and logical system of standards
that regulate the banks, we can create the necessary conditions for the
integration of banking and industrial capital. These events offer the prospect of
bank capital participation in investment processes. Real financing investment
requires motivational basis for banks and debtors, i.e. the need for
manufacturing, financial feasibility and economic viability of the data subjects
relations (Hutsal I.S., 2004).
It is necessary for the subjects of the Ukrainian banking system to regain
the confidence of the population, to resume lending to the economy, to achieve
exchange rate stability and predictability. Elimination of the consequences of
the financial crisis in the long term involves creating a stable financial system
that is at a lower cost will be to overcome the negative impact of future crises.
Building today the perfect resistant to bankrupt financial system capable of in
the event of adverse developments in the economy to maintain normal
functioning, it is virtually impossible, because of the interdependence of the
financial and real sectors of the economy. However, increasing the efficiency of
macroeconomic policy, financial regulation and supervision, will make the
financial system more resilient. During the crisis central banks and other
regulators of financial systems face enormous risks. To overcome the crisis,
they must act carefully and clearly, taking measures to eliminate obstacles to the
flow of funds. We should stop funding insolvent borrowers and troubled banks
their exit from the market will contribute to the improvement of the financial
sector; increase the effectiveness of crisis management in the banking sector,
perhaps by enhancing the control of bank refinancing and provide more
publicity to this process. Constant monitoring uses of these funds by banks
lending to the economy will promote and create an artificial boom in the foreign
exchange market.
There is an urgent need to develop a strategy and priority setting goals that
will ensure the entry of the banking system of Ukraine in the international
financial community. Most foreign and domestic bankers, one of their priority
objectives consider the growth of assets of the authorized capital, the scale of
operations, market share. According to a study Competitiveness Survey, which
ABA (American Bankers Association) held in 2001, 91% of bank managers
believe that increasing speed gives a chance to achieve economies of scale, and
68% believe that the increase in size ensures competitive advantages (American
Bankers Association, 2001). However, a management professor at Harvard
University M. Porter in the 70s of the previous century, stated: To become
great - its not a strategy (M. Porter, 1993). Growth aims to clear strategic
objectives: development of new profitable business areas, expansion of the
promising market, attracting qualified professionals to perform specific
operations, its merger with the financial-credit institution similar profile subject
to the achievement of economies of scale. The result should be to get the real
payoff getting cheap resources, increase profitability, efficiency, competitive
advantage (Karpenko G.V., 2007).

CONCLUSIONS
The strategic goal of Ukraines public policy in the banking sector at the
present stage is to ensure systemic stability and integration of the domestic
banking system in the world financial community. In order to ensure this goal it
is necessary to increase the capitalization of banks, revive investment processes,
as well as promote the restructuring of non-bank institutions, which could be
used to build and upgrade production capacity. The risk of financial instability
can be substantially reduced as a result of reasonable macroeconomic policies,
close international cooperation, further development of the architecture of the
global financial system and effective risk-management establishing by banks on
the basis of the latest information technologies that will facilitate the
implementation in the domestic banking practice of modern risk management
techniques.
Despite the constant change of forms of crisis phenomena, the National
Bank of Ukraine as the main regulator is obliged to form an effective system for
monitoring the stability of the banking sector. With this system it will be
possible effectively identify common signs of crisis factors, such as: excess
liquidity, excess inflow of short-term capital in certain sectors of the economy,
the rapid expansion of lending, excessive credit expansion of banks, rapid
growth of prices for certain types of assets. It is necessary to consider the
factors that contributed to the development of crisis phenomena in the
Ukrainian economy: a speculative building development stimulated the growth
of mortgage lending; monocultural export dependence of the Ukrainian
economy; credit expansion of the National Bank of Ukraine; the foreign banks
interference policy and lobbying of their parent companies financial interests;
uncontrolled increasing of external debt, which threatens the economic security
of the state; underdevelopment of the stock market in Ukraine as in alternative
banking channel of financial resources redistribution.
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