Bill number #0884, adopted by Ukrainian Parliament on the first reading, prepared for the second reading and enactment in general, can lead to a redistribution of the Ukrainian banking system. This week, Parliament of Ukraine was considering a bill number 0884, which was introduced in 2007 by three M.P.s (Voropayev, Akhmetov, Vilkul) from the Party of Regions group. But oddly enough, considering prepared piece of legislation was postponed. The reason for this was an active media campaign of public organizations, banking associations and other lobbyists representing the interests of small and medium-sized banks in Ukraine. Here is the thing why it happened. The above-mentioned bill has been substantially modified in the final revision by the parliamentary committees, if adopted, this bill could lead to significant "redistribution" of the banking system of Ukraine.
What scared the small banks in Ukraine so much? First of all, it is raising the minimum capital for the newly created bank up to 500 million of hryvnias (62.5$ millions). Bankers are confident that soon the strap will be raised for all. Signal for this was the Act #273, issued by the National Bank this Summer, which requires banks to increase the amount of capital up to 120 million hryvnias (15$ millions) that, in fact, would create the problem of finding an investor or a pretender for M&A of half the banks in Ukraine. The second innovation is related to the empowerment of National Bank with new powers; in particular the right to set standards for capital - the minimum amount of regulatory capital and a minimum volume of adequacy of regulatory capital, which today is defined by the Law. Under the current circumstances the «effectiveness» of public control over National Bank, this gives the regulator, in fact, unlimited power over the banking system.
This deprives the players the confidence in the stability of the rules and guarantees for investors/ It will make the banking system vulnerable to the risks of subjective decisions of the National Bank. National Bank of Ukraine administration, not Council of the National Bank, which logically would have to make strategic decisions, and for this body could be given the authority by the bill number 0884 which this bill takes away from the Parliament, but to do so the structure of National Bank of Ukraine Council should be expanded to include representatives of Banking Associations and Unions.
Let’s compare in details the rules of the Ukrainian market with the European. It should be noted that the proposed by parliamentarians innovations are much stricter standards than for example the Basel requirements for the structure of assets and capital. For example, in the EU the amount of capital of newly created Bank must be at least 5 million euros, we have in fact 7 million euros and by the end of 2011 it should be 12 million euros, and the bill proposes to rise it up to 50 million euros, that is 10 times higher than EU standards! In addition to the standards of Basel regulators around the world will move gradually, offering not only the quantitative requirements, but also the relative and qualitative indicators of the efficiency and stability of the bank. This proposed bill included only quantitative changes. In the current economic conditions, a significant increase in the capital before the end of 2011 for some will be beyond power, even successful and stable, but small banks. Besides, as far as it is reasonable in this situation when both rate and adequacy of regulatory capital banks are now according to the National Bank of Ukraine is 20%, which is twice more for the norm, equity in the banking system of Ukraine to the total assets is more than 14%, when Basel standards require at least 8. In addition, in the West bank it is allowed to form capital by a variety of financial instruments, including derivatives. To do so such steps were taken to improve the conventional (Basel) requirements for the quality of assets and capital and to improve the real liquidity of banks. Capital of domestic banks is formed exclusively by real money.
These changes would not lead to good consequences. Such a rapid raise of capital may, oddly enough, lead to the deterioration of the quality of capital and a reduction of paying capacity, since the capital increase will be achieved mainly due to registration of subordinated debt, which already make up about 20% of the capital of the domestic banking system. Fortunately, the Ukrainian Parliament made a wise decision on December 14, postponing consideration of this bill, adoption of which would lead to elimination or absorption of two-thirds of Ukrainian banks, as well as the empowerment of the regulator. So that the legalization of an oligopoly in the banking system of Ukraine is deferred, but an indefinite term.
Oleksandr Tsaruk Ph.D.
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