What You Need To Know:
✅ Ukraine’s Finance Minister reassures customers of PrivatBank, the country’s largest lender, that their money is safe and the bank works normally.
✅ Ukraine’s National Bank Head: ‘We assure you - the situation is under control. We do not expect significant outflows of deposits’. PrivatBank was partly owned by businessman Ihor Kolomoyskyi, one of the country’s richest and most influential oligarchs.
✅ Under a strict Western-backed financial reforms program, Ukraine is obliged to close down lenders who fail stress tests based on capitalization targets. But with just over 35% of Ukraine’s total private deposits, PrivatBank is seen as too big to collapse.
✅ Ukraine National Bank Council Deputy Chairman tells Hromadske: ‘I think this is good news from a conceptual perspective because Ukraine has a tendency to postpone resolving the problems’
It could be one of the most important political and financial stories of the month, if not of the season, and we are speaking about the possible bailout of the biggest Ukrainian bank called PrivatBank. It started with the change of the regulations of the nationalization of the banks by the Cabinet of Ministers in Ukraine, but this is definitely a bigger story with a lot of parties involved. The bank is partly controlled by one of the richest people in the country Ihor Kolomoyskyi. He has control over some part of the assets but there is a story with the National Bank with the president, Prime Minister, and even the IMF. We’re here to explain the whole issue and its relevance to the region and to put it into context but before that, this is what the representatives of the bank itself said to press and to the public.
Hromadske’s Nataliya Gumenyuk and Maxim Eristavi spoke to Tymofiy Mylovanov, Deputy Chairman of the Council of the National Bank of Ukraine during live broadcast of The Sunday Show on December 18th, 2016 in Kyiv.
We really would like to explain what it means to the country and we are happy to have Timofiy Mylovanov here who is a member of the Council of the National Bank, a Ukrainian economist to talk about issues in particular to explain what it all means and what the relevance is to the economy and what we really are experiencing and anticipating besides the whole political context which exists in Ukraine.
So the importance of the bank of PrivatBank is it's a large bank. It’s one of the three systemic banks. There is a line in the memorandum of the IMF about systemic banks and that this is one of many other banks which are undergoing stress tests over the last years and they have to recapitalize to increase the assets or make sure they're solvent in multiple ways. and different banks are dealing with this issue in different ways and that's natural and some banks, in fact, become bigger. You mentioned Poroshenko’s banking Empire; I wouldn't call that an Empire. They’re actually a set of international banks, which have weathered quite well under the crisis mostly because their owners recapitalized or added capital to the banks. And that includes foreign banks, Citibank for instance from the US, European banks as well as banks with ownership in Russia. Ukrainian banks have difficulty adding capital because the owners of the banks are Ukrainian either companies or individuals and Ukraine is in crisis. So it's natural that for large international corporations or banking systems it would be easier to recapitalize. So it's not very surprising that Ukrainian banks have somehow a more difficult time getting through the crisis. In addition, their business model is often slightly too embedded into the Ukrainian economy. While the foreign banks or some other banks--including Ukrainian banks--take a conservative model. So this means that they experience larger losses potentially with their portfolio and so their problems become more acute for them.
Don’t you find it a bit disturbing or odd that after this stress test that is one of the demands of IMF and presumably the government and you know other financial institutions went through it, the first thing that comes up after this stress test is in that nationalization of the biggest bank in the country which can send tensions running very high abroad as a sign that the Ukrainian financial system in such a bad shape that even the biggest bank is in trouble?
So, in fact, the analysts around the world, the financial analysts, the investment analysts are pretty aware of the situation within the banking system and also the real sector in Ukraine. And this is really not news the current state of affairs with specific banks including the specific bank. Of course, there's confidentiality of information and in the very particular details of the situation are not known but potential available public information are in the recent financial stability report released by the National Bank of Ukraine. If I’m not mistaken, last Monday there is information about the banks which banks past stress test and which have not and many of the banks have not. So the approach of the National Bank of Ukraine has historically been to give this Bank some room to some time to bring their assets and their capital into accordance with some programs.
So the bank, the big bank we're talking about is not the only bank, which is required or expected to add capital or to clean up their portfolio or do other steps to ensure solving in the medium and in the long run. and different banks respond differently. So this is not news. What might be news is whether a specific bank has fulfilled the conditions of adding capital and whether this recapitalization has been verified. The governor of the National Bank, Valera Hontarova about a week or ten days ago said that the decision to approve or not whether PrivatBank has fulfilled the conditions of adding capital or whether these conditions will be verified by the end of the year. It is not very surprising that there is some discussion about how well the bank has met the conditions of adding capital since the market expects that.
In Ukraine, politics the economy and the financial sector go so close together, and every second Ukrainian has something to do with this particular bank, of course, it creates some kind of a panic mode, and there is a feeling of lack of transparency. And if there is less information, the people are confused and that already can cause a panic. So how do you see these things could be avoided? Because it really has an impact. And also, what would be the burden and possible impact on the Ukrainian economy in a country, which you know, depends on foreign funds and doesn't have really enough of money?
So if I can be a little bit more direct, the relationship between politics and big economic corporations or banks is present in other countries as well including the ‘very developed’ countries. So that's not surprising that we see a little bit of --in the media and elsewhere--we see some strategic leaking and also not so strategic leaking of information. We see some posturing through media, we see different press officers making different statements. This is a bargaining game, which is about again, the conditions on specific issues.
This is normal. I think this is good news from a conceptual perspective because Ukraine has a tendency of postponing resolving the problems. The entire issue with all the banks in the financial system is that cleaning up the financial system, making it solvent and stable is important in order to start up the economy. But the bank--many banks--can be operational while they're lacking a medium to long-term stability.
So while on the surface they could be okay and there might be even a chance that everything will be fine in the future, we cannot really put pressure on the banking system until it's clean. It’s a little bit like an engine. The engine is working but we need to move forward and we need to get on the highway and not drive on the bypass road. And so the car seems to be working okay but we know there could be potential problems. We need to check that car so we can bring it to the highway. And so the fact that this issue is being discussed suggests in fact that there is a serious effort being undertaken in order to make sure that the financial system is being cleaned up.
Now Ukraine has a tendency not to do these things, not to do its homework and the fact that you know if this thing is resolved and we don't see much panic --and I’ll comment on the panic in a second--and we see that it's done professionally, whatever is the solution is. Either the bank verifies that it has added capital--great news. Or the bank doesn't verify that but then the government takes steps, which are natural, makes sense, there's no panic, the bank is functional and so on and so forth. There are five to ten scenarios….
I think that's good news that, in fact, Ukraine is moving forward.
But before we go into a panic, the issue of accountability and again, putting in perspective not just taking this case, we have a long history of the Ukrainian government helping out owners of banks, who would bankroll their banks then put a price check on the Ukrainian taxpayers. And it’s a long history of bailing out the Ukrainian banks one by one, then putting all the issues with paying debts on the Ukrainian taxpayer.
The worst case scenario could be when you have an insolvent bank let’s say in 2004, 2010--and that has been done in fact in Ukraine. The banker or the owner comes to the government and says, “Okay, give me money to bail me out, but I keep the ownership. I'm not going to add my capital I'm asking taxpayers to add capital essentially.” Maybe under the name of refinancing or something else, “We will pay you back but we'll pay you at a very low-interest rate or maybe we will not pay you back or we will pay you later when the currency will devalue,” and so on. And that has been the history. I think what is in fact surprising is that so many banks have been closed that have not been solvent because the political process as you rightly pointed out tends to be not only in Ukraine but also in the US and the 80s, that's a classic example where the government didn't want to bail out or it was too afraid to take hard measures when the credit unions went or thrift institutions went insolvent because of high-interest rates. You had up to 85% of thrift institutions being insolvent and the government didn't take the right actions or strict enough actions until later and then the price tag was ten times higher. So the issue here is that we actually observing that the Ukrainian government is with, whatever little flaws or large flaws, actual trying for the first time in 25 years to resolve these problems.
But what possible burden is this kind of thing for the Ukrainian budget in this particular economic situation?
So first of all when we're saying that something is missing or maybe the reason we need to add capital we're talking about the longer-term spread.
The numbers, we're not talking about the numbers which are immediately will be released for the amount of capital which needs to be brought in immediately on any bank. So the bank is a machine which is operational and when we see that something is missing we're adding capital that means we're worried that maybe tomorrow or two months from now or two years from now we won't be able to meet the obligations. and so we need to ensure that there is sufficient capital to meet them.
We again we're working for the medium and the long run. So in that sense, in the short run--I mean tomorrow, today--there could be total sufficient liquidity in the system. In fact, what we know is that the Ukrainian banking system today we have up to 70-80 billion Ukrainian Hryvnias liquidity. You know there’s structural distortion. Some banks are liquid while others are not but we have liquidity. At the same time, we have sufficient non-performing loans about fifty percent of loans today are not being performed. That’s a paradox. We have liquidity in the banks, sort of half money. At the same time these loans that they issued over time, they're not being performed. That doesn't mean that what they will not be performed tomorrow. If the economy picks up those businesses will get their own liquidity they might be able to pay back. So we need to put capital in place now to ensure that out of those loans some will perform.
The problem is that the economy hasn't been performing well.
Yes but again, it's a sort of an egg and chicken issue. Until you have a stable financial system which is prudent and you don't have a government getting in the pocket of taxpayers every moment they have a problem, you can't hold that the banking system will start driving the economy forward. Right?