Recent changes by the Cabinet to banking regulations are designed more to ease the government’s financial problems than to support Ukraine’s banking system, financial experts believe.
The changes in question came Feb. 11, when the Cabinet amended bank industry accounting rules and delayed repayment of some government debts to banks for five years. At the time, the Cabinet declared the moves an effort to shore up big state-owned banks.
But market analysts say that without those steps, and without the continued friendly assistance of the national banking industry, the government could have faced a dramatic cash flow crunch.
‘Sure the government wants to support the banking system,’ said Ivan Kompan, a banking analyst for Wood & Company. ‘But also these measures are a way to keep the money legally coming [to the government]. It’s sort of an accounting trick.’
Saddled with high volumes of non-performing loans to state enterprises, state-owned banks would seem to have reason to be wary of sinking even more money into moribund parts of the state sector. Indeed, providing loans under such conditions would be illegal.
‘The law is very clear,’ said Odessa-based financial analyst Andrei Reptushenko. ‘Banks have a maximum percentage of total assets they can loan out and they are not allowed to exceed it … nor can the banks make new loans to companies which are late on old loans.’ Thus the Cabinet’s Feb. 11 order, which had the effect of bending the rules.
The order changed the status of ‘repayment guarantees’ also known as government IOUs – from the Ministries of Finance and Culture to both commercial and state banks, making them assets which can be legally counted when banks total up their balance sheets.
With more assets on balance, banks will have the resources to loan out more money – to the government. The order singled out Prominvestbank, Ukrsotsbank, Bank Ukraina, Ukreximbank, and Sberbank for a special relationship with the government. The five big state-owned banks have been shouldering the bulk of the government’s debt to banks and constitute 75 to 80 percent of the nation’s banking industry.
Prime Minister Valery Pustovoitenko last week expressed concern publicly that the five banks were in precarious fiscal health, saying the government might have to intervene to support them. The significance of his words was not lost on those who follow the banking sector closely.
‘These are political banks which are very closely linked to the government,’ Kompan said. ‘You can’t really talk about these banks working independently of the government.’ Under the new Cabinet rules, in addition to being allowed to count government IOUs as legal bank assets like every other bank, the five big state banks will have repayment of the debt owed them by the government ‘delayed’ for up to five years.
The five banks will receive something in return. In the interim, the government will pay back a portion of its debts to them not in cash, but in Treasury bills. This is more attractive still for the banks because under the new rules they will be allowed to skirt legal limits concerning the percentage of T-bills that banks may count as a part of their total assets, provided the particular T-bills in question were provided by the government to cover state debt.
Why allow the five government agent banks to hold more T-bills as assets than stipulated by law and allow all banks to count government IOUs as assets? On the face of it, these moves would seem odd for a government that claims to be concerned about the viability of its banks. Analysts say the government’s actions make sense when one considers that the new rules will bolster the paper assets of banks, thereby improving their ability to loan money to the government.
‘The government just doesn’t have the money to pay the banks what it owes,’ said Reptushenko. ‘So what they [the government] have done is issue [government] promises for the purposes of bank accounting.’
The bankers themselves agreed the measures were aimed primarily at keeping the government, rather than the banks, afloat. Some charged that the Ukrainian government, and most certainly not the country’s financial institutions, is the one with the financial problems.
‘We’re still profitable, although admittedly a little less so than a year ago,’ said Prominvestbank spokesman Dmitry Zaichenko when asked what was his bank’s reaction to the prime minister’s recent statement. ‘But we’re a very long way from bankruptcy. We’ve lived with these government debts a long time, and we don’t think that what the government owes us is too dangerous for our bank.’
