Changes, even the superficial ones, always create inconveniences not only to those who lose something as a result, but also to those who just abhor them or are not mentally readyto face them. Such citizens oftenmake up the majority of the electorate and cannot be ignored. Any reform can be justified only by the result that it is bound to eventually ensure a change of life for the better. This is something that politicians and advocates of changes understand too well: there must be a reason for a reform.
However, if we trust what the TV tells us, we can get the impression that reforms in Ukraine’s banking system boils down to superficial changes, negative without exception. Closed banks, lost deposits, unaccountable bankers, unpaid refinancing and a lot more have become buzzwords for most Ukrainian, as well as populist politicians that try to improve their rankings byechoing negative news. At that, the essence of the ongoing reform remains in the shadows.
The best known change so far has been the transparency introduced not only to the work of the National Bank of Ukraine (NBU), but to the entire banking system. The amount of information published by the NBU in the past three years has probably doubled. The NBU itself reports on its actions in monetary and exchange rate policy. The NBU website provides information on bank owners, refinancing provided to banks, and much more. Transparency is gradually increasing. One could wonder how transparency is linked to the living standards of Ukrainians. In the developed countries, this relationship is paramount. More transparency means more trust, fewer market fluctuations means fewer risks, and all that leads to cheaper loans, more stable financial system, fewer and less severe crises.
Transparency matters for Ukrainians for a different reason as well. For example, when society did not know the identity of bank owners, it was easier for them to engage in fraud and avoid accountability. They didn’t risk losing their property that could be used to cover the claims of depositors of a bankrupt bank. Now, the situation is different. The bankers will have to think twice before committing a crime, and this is bound to reduce the risks of both specific banks and the system as a whole. That is, even this visible change has its impact on the quality of the system even if the impact is not really obvious yet.
This reform brought about another one that will radically change the banking system. When the NBU knows final beneficiaries of all banks, it can track their related companies. This creates the prerequisites for eliminating the scheme whereby most Ukrainian banks used deposit money to give loans to the companies of their owners. As soon as the banks faced problems, the owners fled abroad, the money remained in the accounts of their companies, usually offshore ones, and the bank together with the cheated investors was put at the mercy of the state, that is, the taxpayers. This will no longer be possible. The NBU now tracks related companies and forbids lending to them (more precisely, it only allows loans that make up a small portion of the bank’s assets). So, the number of spontaneous bankruptcies, as well as the number of cheated investors, is bound to decrease. At the same time, the risk in the banking system in general will decrease, and the state will not have to intervene so frequently throwing taxpayers' money down the drain. This in itself is a huge change that will have an invisible but significant positive impact on the citizens' wallets.
Reduced lending to related entities will completely redraw huge cash flows in the economy and the financial sector. Previously, the oligarchs had to open a bank and use it as their own pocket in order to have enough funding for their businesses. This is no longer possible. Oligarchs still have their funding needs, and will have to compete for money resources. This will push them to be more transparent, structure their businesses properly, and so on. In short, they will have to become civilized players.
Second, the banks will have huge amounts of liquidity that they will no longer be able to pump offshore. Once the demand of big business for loans is satisfied, they will be able to lend to small and medium businesses at rather affordable rates. The structure of the economy will turn upside down, because the loans issued now will not be large, inert, inefficient and non-transparent, but small and lucrative. At the same time, the economy might undergo structural changes.
Third, deposit and loan interest rates will drop. Earlier, the oligarchs attracted depositors' savings at any rates because they could not find other funding. They also know that they could shut the bank down (along with the money of the depositors) as soon as this became unprofitable. Current changes in the banking system have closed the space for such scams.Given the excess of liquidity, financial institutions will try to limit the inflow of deposits by reducing deposit interest rates. At the first glance, this will impact depositors negatively. AT a closer look, their savings will be protected. The real value of the savings will grow at a pace not slower than beforeif the NBU manages to reach its inflation targets.The obvious winners will be the borrowers: low deposit rates mean cheaper loans.
Another large-scale and complex problem of all banks without exception until recently was the quality of the collateral. Bankers can quote many cases, when a pledged vehicle was sold without the bank’s knowledge and the respective loan was never repaid, when a number of residents was registered in a pledged apartment so that the bank could not seize it, and mortgage was not repaid, or when corrupt courts awarded obviously unfair decisions in cases related to the seizure of pledged assets from businesses or individuals. Ukrainians may experience schadenfreude at the misfortunes of the voracious banks. However, the consequences are reaped by everyone, since financial institutions would factor these risks in their lending rates (making them unaffordable), refused to lend to honest borrowers. In the end, this factor could be the last straw that would lead some banks to a collapse. This is an incredibly complex problem, and the government is trying to solve it. During the past year, two bills were enacted that ensure quick seizure of pledged assets. The Cabinet has passed a resolution that reduces the risk of pledged vehicles being sold without the knowledge of the bank, while some Supreme Court rulings have also stepped up legal protection for creditors. The current situation is far from being ideal, and this inhibits lending. The reformers have a vision of how to overcome the existing problems: it is presented in bills that are now gathering dust in Parliament. This is exactly the case when a reform requires consolidated efforts of basically all key government agencies. So far, there are no such efforts and, therefore, no results.
Another problem is as follows: when a borrower in a down economy gets into a difficult financial situation, the caseremains frozen for years. Trials on it can last forever and neither party is able to win. The borrower has to carry an overwhelming debt burden, not being able to ever repay the loan, while the bank keeps trash on its balance sheet and is not able to get rid of it. International experience indicates that the problem is quite serious: it took the US a year to clean out balance sheets of its banks through special laws. After this,the American banking system has come a long way forward. The EU was unable to accept the new reality and kept fighting the debt crisis and its impact on the banking sector for about five years. In some member-states, such as Italy, some banks have not recovered still, and are on the verge of bankruptcy. There was an attempt at solving this problem by passing the law on “financial restructuring". It enables an out-of-court resolution of a dispute between the bank and the borrower through voluntary writing off of part of the debt, while the borrower still repays what he or she can and the bank does not have to write off the entire loan. In theory, such schemes benefit both parties. In practice, there may be barriers to their implementation in an environment where nobody trusts anybody.
There is also the problem of laundromat banks engaged in money laundering, conversion into cash, siphoning abroad, and similar schemes. It would seem that it is not the business of an average Ukrainian if someone takes their money out of Ukraine or converts the earnings in cash in order to pay salary in envelopes. The answer is simple: if a bank owner is ready to commit systematic criminal acts, then he is not ready to guarantee investment security. In the end, average Ukrainians, depositors of such banks, had to pay for questionable operations of their bankers. The NBU has been trying to deal with the problem since the beginning of the reform. As it turned out, the law overlooked some shady schemes previously used by the banks, and therefore such schemes did not exactly qualify as illegal. This problem has been identified and resolved, and the general requirements to banks have become much stricter. This gives us reason to hope that money laundering at the previous scale is over.
Last but not least is theissueof national security. While dozens of banks with Ukrainian capital have gone bankrupt, Russian banks werediligentlypouring additional capital into their Ukrainian subsidiaries. This expansion continues. This issue is not necessarily within the competence of the NBU, but it definitely needs to be resolved.
Overall, Ukraine’s banking system has undergone dozens of changes. Not all of them were successful since they require coordinated efforts of many government agencies, and some of those act as if they missed the Maidan. Yet, a lot has been done. The changes brought about by the banking reform justify the losses suffered by the country in the process of implementing it, even though they are not yet reflected in the statistics or discussed on TV.
Ukraine needs to prepare a consolidated claim on Russia’s responsibility for its armed aggression to be used in international courts, as well as laws on the occupied territory and the restoration of territorial integrity