Capital increase or liquidation?
The government’s anti-crisis strategy: billions from the budget for big banks and a procrustean bed for small ones
Now that the local elections are over the government can devote its undivided attention to the economy and fulfilling its promises. The number of these promises keeps increasing, but I would like to focus on just two. Before the end of October the government intended to decide about the capitalization of the problematic banks, Nadra and Rodovid Bank (both based in Kyiv), at the expense of the central budget. In 2009-10, a total of 26 billion hryvnias have been spent on the nationalization of three commercial banks and the capitalization of two government-run banks under the recapitalization program. Some sources indicate that the possibility of spending another ten billion is being considered. “Before the end of the month the audit reports will be made public and a decision on the capital increase made,” declared Serhii Arbuzov, first deputy head of the NBU.
Toward the end of last week Deputy Prime Minister Serhii Tihipko spoke about the Cabinet’s hopes for lowering the state budget deficit to 4.9 percent. However, in this regard one should look at hard facts rather than hopes. According to the deputy prime minister, the current budget deficit is 15 percent, implying that Ukraine is on the brink of bankruptcy.
Tihipko spoke about how the government would overcome these problems and mentioned the Cabinet’s short-term strategy. Along with slogans like “Budget Deficit Stabilization” and “Better Investment Climate,” there are quite realistic banking reforms: “We ran two stress tests for the banks, stimulating a capital increase. Bank capitalization has been improved.” He added that the banks now have twice the minimum required. So fast? Was it a result of those stress tests? And why does Standard & Poor’s and the Financial Initiatives Agency consider that Ukrainian banking transparency has dropped this year to the 2006 level?
Predictably, this policy is elaborated relying on stress-testing findings. At present, it appears to be aimed at leaving only big banks on Ukraine’s financial market, ones backed by either domestic oligarchic groups or large foreign banks.
This is confirmed by the NBU Resolution No. 273, of July 6, 2010, whereby the banks are under the obligation to increase their regulatory capital to at least 120 million hryvnias before January 1, 2012. The banks with lower capitalization are prohibited to enlist individual deposits in excess of sums received up to the date of the resolution.
The Association of Ukrainian Banks opposes this attempt to divide the banking community into big and small, rich and poor banks. Jointly with ten commercial banks, AUB filed a complaint with the NBU, demanding the cancellation of the resolution which, in the AUB’s opinion, violates the rights of medium and small banks, and is aimed at elbowing them out of the market or helping bigger banks absorb them. A claim was also filed with the District Administrative Court of Kyiv. It demands that certain clauses of the resolution be recognized as null and void.
In all likelihood, this complaint will be denied. On October 27, the NBU’s number two Serhii Arbuzov said the National Bank would insist on its regulatory capital increase requirement because “this decision is substantiated and coordinated with international organizations.”
The Ministry of Justice replied that there are no grounds for annulling the NBU resolution: “Resolution No. 273 was issued within the jurisdiction of a rulemaking entity […] there are no grounds […] for the prohibition of the decision on state registration.” This document also reads that changes in the clauses relating to higher regulatory capital increase requirements “conform to international trends and are aimed at securing the stability (viability) of both separate banks and the whole banking system of Ukraine.”
Journalists who visited the District Administrative Court last week asked AUB President Oleksandr Suhoniako about the possible consequences of the NBU resolution. He answered that “this resolution places 69 banks in a very difficult situation. Moreover, the National Bank is preparing another resolution that will raise the amount of regulatory capital to 500 million hryvnias for new banks. In fact, these new clauses are binding on more than 140 banks. If removed from the market, there will be only 40 banks left. The NBU claims that small banks are violating some rules, that they’re laundering money, and conducting unlawful foreign exchange transactions. We are also resolutely opposed to transgressing banks and such banks must be closed, but this must be done on an individual basis; in other words, a transgressing bank must be punished not because of its size but because of its transgression. The NBU is hard put to do so because a transgressing bank is always protected by somebody somewhere. Now closing all of them is much easier, and no one is worried that most of these banks have Ukrainian national capital.” Suhoniako jokes: “As resolved by the National Banks, all Ukrainian cats must turn into lynx if not lions overnight, whereas in America you can find a bank with a mere 100,000 dollars’ worth of capital… If problems are created for small banks, the competitive environment will dramatically deteriorate, with all the negative consequences.”
P.S.: The latest session of the District Administrative Court in the case under study was adjourned until November 8, so both sides could prepare additional argumentation.
