You're reading: Experts say recapitalization of banks is necessary, but how to do it fairly is the question

Some experts think Ukraine's banking sector needs more than $8 billion to achieve financial stability. While some banks may emerge from the crisis in better shape, one lawyer does not preclude “a meltdown.”

Ukraine’s banking system suffered a net loss of Hr 53 billion (more than $2.5 billion) in 2014, with one-third of the amount coming from insolvent banks.

As a result, the Verkhovna Rada passed new measures on Dec. 28 requiring additional capitalization of the country’s banks. At this point, the government plans to allocate as much as Hr 28 billion in 2015.

Seventeen out of 35 big banks have failed stress tests and have not met the requirements of the National Bank of Ukraine. The hryvnia’s substantial devaluation has significantly contributed to the banking woes.

Local banks are particularly vulnerable, says Oleh Zahnitko, a legal expert at Gide Loyrette Nouel.

Experts think that the banking system could need as much as Hr 170 billion ($8 billion) cash inflow to achieve stability, while the central bank thinks that Hr 66 billion is enough.

Ihor Olekhov, partner at the law firm Baker & McKenzie, believes “the NBU had no choice but to implement aggressive steps to save the Ukrainian banking sector from a complete meltdown.”

A passerby walks past currency exchange table on Feb. 26 in Kyiv. (Volodymyr Petrov)

To eliminate insider deals and protect depositor interests, a new law bans the payment of dividends by commercial banks. It applies to both compliant and non-compliant banks, which experts criticize.

“Compliant banks are threatened by the draconian powers of the regulator,” says Gide’s Zahnitko. “Thus, their natural reserve strategy will be to look to exit the market rather than to invest in the Ukrainian business.”

Experts recognize that many other steps need to be taken.

Oksana Volynets, an expert at Wolf Theiss, proposes giving incentives to banks and borrowers to restructure bad loans and to convert the loans denominated in foreign currency into hryvnia at a reasonable rate. Declaring individuals insolvent is also an option, a common instrument in developed economies.

Moreover, long-awaited measures aimed at reducing legal risks for banks should finally be introduced, Volynets says. Otherwise, the failure to protect the rights of banks as creditors will lead to their inability to repay deposits, which will affect many.

If politicians introduce a moratorium on enforcing mortgages in order to win over their electorates, for example, banks will suffer because of a lack of enforcement mechanisms over the assets acquired by borrowers via their banks’ loans, according to Olekhov of Baker & McKenzie.

He sees huge opportunities for the banking system during the crisis. “In the banking sector, the strongest and fittest banks will survive and the sector will become much more transparent,” he says. “However, one may not exclude a scenario that the banking sector may experience a meltdown and will need to be reconstructed virtually from scratch.”

Meanwhile, Gide’s Zahnitko is skeptical about the law on capitalization, believing that it is a means for procrastinating, rather than for solving more fundamental problems.