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Nowhere was Ukraine’s economic decline more obvious than in the banking and financial sector. Eroding public confidence, a weak deposit insurance system, and an acute national currency depreciation led to massive deposit withdrawals and a banking sector that was in urgent need of recapitalization. 25% of hryvnia-denominated bank deposits of households had been withdrawn from the pre-crisis peak numbers of September 2008 to their bottom level of October 2009. New lending activity virtually stopped with the level of loans to households steadily declining since December 2008. Non-performing loans reached critical levels requiring most banks to form record-high loan loss provisions bringing their reported profits down.
With the IMF’s assistance in the form of a standby loan facility ($16.5 billion) and the Ukrainian government’s efforts to recapitalize the most vulnerable banks, to place banks under provisional administration, and to strengthen the Deposit Insurance Fund through funding from the state budget, Ukraine managed in the short-run to avert a worst-case scenario of widespread defaults and bank failures.
Risks to financial stability remain, but recent developments have shown signs of improvement in the sector. On the positive side, with public trust in the banking system largely restored on the basis of the relatively stable national currency, and no new problems seen as emerging in Ukrainian banks, individual bank deposits have demonstrated a continuous growth over the past year, eclipsing the pre-crisis levels. Lending levels have not rebounded so far, but this fact may also be viewed as a positive effect as the consumer debt has decreased from its excessive levels back in 2008.
Regardless of the recent optimistic trends, legal, regulatory, and institutional deficiencies still put at risk Ukraine’s ability to maintain its banking and financial system at a sustainable level. At this crucial moment, one of the goals of FINREP’s mission is to assist Ukraine to rebuild from the consequences of its economic and financial crisis and establish a sound, transparent, and resilient banking and financial system.
FINREP experts will also perform regular analysis of developments and trends in the banking and finance industry.
Analytical reports and overviews will be used to adjust the project’s strategy and will be made public using the project’s website and other media.
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