Will the Banks Be Forced to Give Up? The encroachment on banks’ interests is obvious and inevitable

About two weeks ago, commenting on the death of Vadym Hetman, Chairman of the Board of the National Bank of Ukraine Viktor Yushchenko said, “Banks will have to give up. But not to the extent of humiliation. Hard times are ahead.” The essence of this remark was interpreted then only generally. Yushchenko seemed to be hinting that the banks would have to step back. The context of the banker’s remark and the possible subject of concessions became more or less clear only recently, after the round table with the Prime Minister.

In fact, the state has now admitted that the generale unfavorable situation in the monetary field is clearly revealed through the need for the executive to support two financial pyramids, budgetary and banking. Since September, the Finance Ministry has been facing problems regarding the placement of domestic government bonds: the demand for such bonds was gradually declining and the cost of servicing them gradually increasing. Until recently, the banks have been obediently buying the bonds and helping to finance the budget deficit. The state then came up with a new trick to force banks to buy these bonds. However, even this measure has little semblance to the earlier mass support by commercial banks. This situation can be explained very easily: the real assets of banks are rapidly dwindling and the servicing of the domestic debt on the former terms is a too heavy a burden for them to bear.

The Premier’s meeting with bankers, (to which, incidentally, journalists were barred) most likely discussed a new formula for cooperation under conditions of mounting financial crisis. First, the government, which is experiencing a shortage of money, is interested in the reduction of budgetary allocations for the banking system. It would be logical should the government propose to bankers to increase their investment in domestic bonds so as to at least balance their service and redemption. Second, the government has again asked the banks not to press on the immediate repayment of commercial government loans. These loans were usually granted by state banks to finance unprofitable projects. Currently, these debts are substantially undermining the financial state of government-associated banks such as Bank Ukrayina, Prominvestbank (industrial investment bank), and Ukrsotsbank (Ukrainian social bank). Third, banks will obviously have to accept growing competition in the financial market. The NBU (most likely, under Cabinet pressure) has lifted restrictions concerning the establishment of foreign banks in Ukraine. It should be mentioned that the Association of Ukrainian Banks has always opposed this, arguing that the nation’s banking system is not competitive. The NBU requirement to convert the currency share of the foreign banks authorized capital into local currency will not bring much comfort to Ukrainian banks either. However, this measure will somewhat increase the supply of hard currency on the market and slow down the expenditure of NBU hard currency reserves.

The encroachment on banking system interests is obvious and inevitable. Virtually all transition economies have experienced more than one banking crisis. The only question is what price the banks will have to pay and which banks will be able to afford it? Instead of government concessions, Mr. Yushchenko is advocating banking measures which are viewed differently by the banking community. For instance, banks support the idea of establishing funds to insure individual deposits and credit risks only when taxes are reduced. The same concerns the concentration of bank capital: the NBU is willing to nudge banks toward mergers and takeovers (successfully used by Russian bankers), while the banks balk. The tightening of bank supervision, currency and securities markets operating rules, the observance of economic standards, etc., is associated with similar problems.

In brief, bankers are still cautious about the terms of their cooperation with the government (or rather the possibility of cooperation with the government on the terms of the Peoples’ Democratic Party) discussed during the last two days. Whether bankers will want to leave power to the ruling party will depend on whether conditions will be created for the large Ukrainian banks to accumulate capital: high returns on domestic bonds, enacting a bankruptcy mechanism observing creditors’ interests, eliminating of double taxation, etc.

Incidentally, last Monday Viktor Yushchenko again denied economic motivations for Vadym Hetman’s death, noting that in the time that had passed after the tragedy, he became more convinced that it had no underlying economic cause. It appears that nothing special has occurred lately. And maybe this is the main thing?

Photo by Viktor Marushchenko, The Day:
Viktor Yushchenko