Business Sense: A prescription for nation’s troubled banking system

Oleksandr Savchenko writes: Trust won’t return if unfairness and injustice continue to rule the day. Fresh anti-crisis and reform programs have started to sprout up like mushrooms in a moist forest after Ukraine’s presidential elections. In reading some of them, however, I have come to understand that Ukraine could soon confront a fresh set of economic and bank-sector problems rooted in the unprofessionalism of the authors crafting these reform plans.

The non-integrated approaches being offered lack a basic understanding of contemporary economic knowledge and discussion. Furthermore, even the recommendations to Ukraine from the International Monetary Fund and World Bank have outlived themselves to some extent, as they are based on pre-crisis economic understandings.

In my opinion, the foundation of any new reform program should, ironically, be based on the following Marxist principle: “the truth is always concrete.” The stupidity of many people is immediately revealed when they get “concrete” in their actions. And so, confident in my own views, I will limit myself to laying out only “concrete recommendations” on how to pull Ukraine’s bank sector out of crisis

The underlying thesis is that Ukraine will only pull out of the crisis when business and individuals regain trust in banks. The fact that trust has been broken is backed up not only by a 8.3 percent decline in deposits last year, but by a panic mood dominant among bank clientele, including both by citizens, who saw their deposits wither away and erode in value, and by businesses, who saw their basic rights ignored by banks, regulators and the state. It’s no accident that companies’ deposits last year shrunk by 18 percent, and that the credit portfolios and loan volumes of banks are deteriorating.

Ukraine’s state financial institutions have dissociated themselves from the problems of both depositors and lenders. The bank system recapitalization program has been too small and non-systemic. But the main shortcoming has been unfairness.

In this system of Russian roulette, where money walks, not intellect, some were lucky to return their money and even make more, while others suffered unfairly. Under such conditions, it’s very difficult to revive trust in the banking sector.

A complete strategy to fix the system needs to be based on a broad post-crisis program for Ukraine’s economy that takes into account recommendations from world economic leaders, Ukrainian political realities and a sober estimation of the ability of Ukraine’s state financial institutions to do anything constructively.

Taking all of this into consideration, I propose my recommendations to the National Bank of Ukraine and government. On the one hand, they are in a practical sense achievable in a short time frame, and on the other hand effective enough to make a difference. However, they require professionalism, less idealism and, above all, a critical mass of competent managers who understand the problems at hand and are dedicated to the following:

1) economic growth;

2) stabilizing the financial system;

3) ensuring that citizens’ income increases on a par with economic growth;

4) savings of people are not stolen or devalued;

5) banks start lending to the economy and people again, not speculating upon them;

6) prices of goods and assets near European levels;

The main thing that state financial institutions need to understand and remember is that all of their decisions should be based on social fairness. Only then will they be adopted with the support of both society and business.

In this light, it’s crucial to realize that social fairness has nothing in common with populism, which in tandem with corruption has plunged the country to the brink.

The National Bank of Ukraine should function to ensure the stability of the country’s finances and currency, and in supporting economic growth. It should operate openly and transparently. It should operate in a socially responsible manner and be held accountable via effective oversight for its monetary and currency policy, and be prudent in its regulatory functions. These functions should be brought in line with European Union standards and assist the government in supporting economic growth, but not via methods that trigger inflation and devaluation.

The government, with the support of the central bank, should immediately organize a market to insure interbank lending. Developing this money market, primitive in the beginning, should help spur lending not on an overnight or daily basis, as today, but for a three-month to one-year term. This would help unlock loans for the economy.

Another key step would be the formation of a so-called development bank, which would specialize in financing large infrastructure projects, such as preparations of roads, airports, etc… for the Euro 2012 soccer tournament. Someone needs to finally start massive lending, in the Hr 10-20 billion range. And when this happens, other banks will follow, thereby boosting trust and deposits by companies.

One of the three nationalized banks could be transformed into this development bank, but the rest should be sold as soon as possible.

The central bank and government need to swiftly clean up, not bailout, the banking sector from toxic loans and assets – but doing so requires will, as it means going against powerful interest groups. The central bank also needs a clean-up job.

My last, yet equally important recommendation: the bank system needs to start insuring deposits of both individuals and companies, starting at the Hr 150,000 level. This will help calm small- and medium-businesses that so fear our banking system. Such a move would also help to transform the state’s Depositors Guarantee Fund, allowing it to more effectively – with less conflict of interest at play – to liquidate bad banks in cooperation with the central bank.

Oleksandr Savchenko is Ukraine’s deputy finance minister and a former deputy head of the country’s central bank.