More than a third of household deposits have been withdrawn since last autumn. Experts fear that more than half of current deposits could be pulled out by year’s end.
Trust in Ukraine’s banks is evaporating, and fast.
More than a third of household deposits have been withdrawn from Ukrainian banks since last autumn. Experts fear that half of the current deposits could be pulled out by year’s end.
To keep the system afloat for now and avoid a full-blown financial meltdown in Ukraine, experts say that the country’s leaders need to secure fresh financing from the International Monetary Fund. This will serve as a green light for more urgently needed cash injections from Western lenders, such as the European Bank for Reconstruction and Development. The EBRD has alone pledged to inject more than one $1 billion into Ukraine’s troubled banking sector, recapitalizing some of the bigger ones in return for equity.
Fresh IMF funds should help Ukraine’s central bank stabilize a currency which lost about 40 percent of its value last year. Bankers say further depreciation could send the country’s financial system into a free fall.
But after the financial hurricane passes, a deeper overhaul will be needed. Stricter regulation will be needed to prevent the risky lending that made Ukraine’s banks so vulnerable. But to even get to that point, banks need citizens to again have faith enough to deposit their money – hard to do when many depositors can’t withdraw their savings because of restrictions.
“Our citizens and business don’t believe that the currency will be stable,” said Olexandr Zholud, an economist with the Kyiv-based International Center for Policy Studies. “That’s why they are buying up hard currency, building up additional demand and putting it under their mattresses. This is hard currency that businesses could use to pay off their foreign debts. Today the main problem is to prevent citizens from pulling out their deposits.”
A recent study conducted late last year by market research firm GfK Ukraine showed that trust in the country’s currency and banks was breaking. Dmytro Yablonovsky, an expert at GfK, said the trust has since plunged further. Yablonovsky said an increasing number of citizens were seeking to save up cash in hard currency “for a rainy day.” Due to the lack of trust in the banking system and national currency, they are seeking to withdraw savings held in banks and selling hryvnias to buy hard currency.
The list of troubled banks is gradually increasing, as are the number of citizens finding it impossible to withdraw deposits from cash-strapped banks.
This week, the central bank imposed state administration over two more banks: Rodovid and Big Energy Bank, but removed receivership from Prominvestbank, bought recently by Russia’s Vnesheconombank. Prominvestbank was the first bank to be taken over by the central bank, in October when the global financial crisis struck. The rest of the banks, 10 out of more than 180 registered, were taken under central banks this year.
The state has urged banks to seek recapitalization aid from their owners and private sector investors, but pledges to bail out the biggest banks should the need arise; about 17 major banks control two-thirds of the system’s assets, the IMF estimated.
Economist Ihor Burakovsky, however, urged the state to “understand that not all banks have to be saved.”
For one, it’s a costly and possibly unmanageable of a burden for already cash-strapped state coffers. Secondly, Ukraine has “too many” banks for a country its size. Troubled banks should merge, be sold off to bigger, stronger owners, or just disappear.
“It is better to have fewer banks, but more powerful, dynamic and modern ones,” Burakovsky added.
Experts said one immediate way to calm panicked deposit holders is for the state to boost its reserve fund intended to insure losses should banks go bust. The Hr 3 billion fund is not enough to cover deposits of even few large banks. When the fund is increased, the state could guarantee more than the current Hr 150,000 per deposit. Such moves would the fears of citizens who believe their savings could be wiped out.
Looking past the immediate challenges threatening Ukraine’s banks, experts said banks and regulators need to better minimize risky lending.
“One of the major miscalculations we see in the Ukrainian banking sector which led to this crisis is that Ukrainian banks simply borrowed way too much from abroad, relending this money domestically, a process which fueled a consumption boom and inflated asset prices … and often, these loans were risky,” Burakovsky said.
Separately, business daily Delo on March 18 published a ranking called “Top 20: Ukraine’s Safest Banks.” Delo concluded that 16 of Ukraine’s safest banks are foreign-owned, including Citibank Ukraine, Raiffeisen Bank Aval, Sberbank, Swedbank, and Ukrsibbank. Delo’s ranking suggests that two are state-owned – Oshchadbank and Ukreximbank. The remaining two, Donmiskbank and Khreshchatyk Bank, are owned by domestic businessmen.
