In 2006–08, Ukrainian banks were expanding lending fast and made extraordinary profits. In the spring of 2008, Ukraine’s economy was experiencing all signs of overheating. Annualized inflation peaked at 31 percent in May 2008, and the current account deficit reached 7.1 percent of gross domestic product in 2008. Commercial banks with access to the euro market could borrow short-term funds at interest rates of a few percent, while issuing consumer loans in hryvnia at up to 50 percent a year. The artificial peg of the hryvnia to the US dollar caused this large interest gap, and the credit boom unleashed a real estate boom.
From 2006 to 2008, West European banks purchased Ukrainian banks at crazy values of up to five times book value, where multiples of one or two would be normal. The Ukrainian owners boosted the banks’ assets by issuing overly large and risky loans just before they sold their shares.
By summer 2008, the share of 17 West European banks in Ukraine’s banking sector peaked at 40 percent. Now most of them have left. By January 2013, their share of Ukrainian banking assets had plummeted to 20 percent—half the peak value. Leverage—total bank assets as a share of gross domestic product—has declined marginally, and the number of banks has remained stable at 175.