Strengthening Euro Hurts Small Ukrainian Banks
The NBU has shown mercy and come to the rescue of the Ukrainian banks that have found themselves in trouble because of the sharp increase in the hryvnia-to-euro exchange rate. NBU Governor Serhiy Tihipko has declared his readiness to simplify the procedure of increasing the authorized capital stock of Ukrainian banks in the immediate future. The problem is that under the legislation in force the minimum capital of a bank should be no less than three million euros for regional banks and at least five million for banks operating in different regions. Last year the euro rose in price by more than 20% against the hryvnia. As a result, as many as nine Ukrainian banks have failed to meet the requirements for the minimum size of the authorized capital stock and risked losing their licenses.
We are not listing the nine banks for ethical reasons. Yet they have clients and still have a chance to get back to normal. Moreover, Tihipko states that no sanctions will be used against the violators as yet.
Faced with a difficult situation because of their failure to amass the minimum capital required, the nine banks are facing a new problem. The procedure of increasing the authorized capital stock in Ukraine is quite cumbersome and takes up to nine months. It involves issuing additional stock and making the corresponding changes in the register. Moreover, banks have their own complex procedure of registering new stock. Tihipko has vowed to address precisely this problem but has not yet explained how the procedure will be simplified and how soon the banks will be able to amass capital.
Yet the bankers themselves do not seem satisfied with such a concession by of the NBU. The Association of Ukrainian Banks (AUB) has demanded that the NBU stop using the euro exchange rate to evaluate the banks’ capitalization and tie this index to the hryvnia. “They say no sanctions will be used, but small banks still remain under the sword of Damocles. What if the NBU has a change of heart and decides to apply sanctions? This problem should be solved differently,” says AUB Deputy President Antonina Palamarchuk. In her view, it was necessary to use the euro exchange rate to appraise the banks’ capital when the economy was unstable. Meanwhile, in the past three years the hryvnia-to-dollar exchange rate has been stable. And Ukrainian enterprises use American dollars in over 70% of their foreign trade operations.
So far Tihipko is not overly enthusiastic about the idea of using the hryvnia to appraise the banks’ capital, pointing to Ukraine’s strategic course toward European integration and the inadmissibility of backpedaling. “Ukraine’s banking system should begin thinking today about the prospects of our country’s EU membership, even if this is out of the question in the next five to seven years,” he said. It is worth noting that long before Brussels gave neighboring Poland the go-ahead for EU membership it in fact switched most requirements for the banks’ stability to the euro, and this has facilitated the integration of the whole economy.
Yet Ukraine’s EU membership is still a very remote possibility, while the exchange rate of the euro against the dollar and hryvnia is changing for reasons unrelated to our country. This means that Ukrainian banks will continue to face the risk of failing to meet the minimum requirements for reasons outside their control. In fact, in our unstable times one should not rule out a scenario whereby the euro-to-hryvnia exchange rate will soar, and Ukraine will face a threat of a string of its banks going bankrupt. It is doubtful that the National Bank would like to see this to happen.
The AUB and NBU have created a task force to think of a way to address this problem by the end of January. It is not ruled out that the compromise they will reach will be quite unexpected. For example, banks could be allowed to use the euro exchange rate from half a year ago to determine the minimum requirements for the size of their capital. In general, one can say for a fact that the idea to amass the capital of Ukraine’s banking system using administrative measures has failed.
Obviously, the NBU will never dare use sanctions for failure to meet capital requirements, since behind each of the small banks there is an industrial and financial group with connections in Verkhovna Rada. Meanwhile, there are many bills that the NBU wants to pass the parliament.
