Banking on Irresponsibility

Ukrainian financiers overlook for some reason the epic of legitimizing the status of the National Bank (NBU). No foreign exchange panic, no interest rate rise, in a word, complete indifference to the vital question of who has been controlling their money since yesterday. Can they have been mesmerized by a charismatic chief banker? They should not have been. The new law says the chief banker is not in fact such. The chief banker has not yet been selected by the still unappointed seven party and seven presidential representatives. It is not ruled out that the current chief banker will continue in his current position. But the epic is again in full swing...

On May 20, Parliament passed the law On the National Bank of Ukraine in the final wording, and two weeks later the National Bank submitted to the Presidential Administration its comments which comprised a request to veto the articles regulating NBU management and the procedure of writing fines off for commercial banks. It was not clear until the very last moment, June 11, whose recommendations the President will heed.

Those in the know say that several groups pressed for the decision to veto or not to veto. Opposed to the veto were, first, those who feared freezing of the NBU bills On Commercial Banks and On the Banking System. Secondly, the official adoption of the law On the NBU was directly associated with the reception of a World Bank loan by the government. Thirdly, the veto was naturally opposed by the banking lobby, which favored diluting the NBU's powers and the norms of the law that passed. The resistance group proved to be small, the NBU itself and some of those who sympathized with its style of money market regulation, and hence less influential. Hence it was small wonder that on the eve of the prescribed period the President took a very original decision: to sign the law but return to Parliament the articles dangerous to money market stability in the shape of a bill On Amendments to the Law on the National Bank.

Let me recall why the old dispute flared up again. In the approved wording of the law, the NBU Supervisory Board, as the bank's highest ruling body, was vested with very extensive powers: working out the basic monetary policy, introducing proposals for changing it, approving NBU estimated expenses, approving foreign economic transactions worth over UAH 10 million, approving appointments and dismissals of Bank Board members, and vetoing NBU Board of Governors decisions. Moreover, the same law in fact absolved Supervisory Board members of any responsibility for the decisions they make. Conversely, the NBU Board of Governors got a host of responsibilities.

Unbiased observers made an disquieting diagnosis of the law: instead of regulating the rights and duties of the central bank executives, Verkhovna Rada has planted a time bomb under the whole financial market. For we all know only too well what kind of decisions are made under the format of collective irresponsibility. Of course, one can disagree: whatever the case, the law stipulates that the person responsible be chairman of the NBU Board of Governors (i.e., Viktor Yushchenko). However, the experts say, such executive responsibility, coupled with "non-interference" in the essence of what is to be executed, is an aberration bordering on catastrophe for the monetary sphere. In other words, if a certain decision does not lead by definition to the desired result, it will never be achieved, whether somebody is responsible for it or not.

Thus on June 15, i.e., a few days after the President approved the law, Parliament received a bill which, in particular, provided for depriving the NBU Supervisory Board of the status of a highest ruling body and of some other powers, and subordinating this Board to the NBU Chairman. In plain words, the lawmakers were advised to equalize in rights the NBU Supervisory Board and Board of Governors by stating in the law that both structures are the bank's ruling bodies. It was also proposed to withdraw from the law the provision under which the Supervisory Board has the exclusive right to veto Board of Governors' decisions, approve NBU participation in other organizations, approve foreign economic transactions worth over UAH 10 million, give consent to the appointment and dismissal of directors, approve NBU estimated expenses, and ban undisputed write-offs of bank account debentures. In addition, the bill provides for cancellation of the post of Supervisory Board Chairman elected by its members and for putting the board under the NBU Chairman's jurisdiction. The President's request to Verkhovna Rada as far as "maximum" representation of NBU interests is concerned, must have required certain compromises. Otherwise it is difficult to explain why the new bill features a provision (always opposed by Mr. Yushchenko in the past) that empowers the bank to buy treasury bills on the primary market (i.e., it preserves direct credit to the budget).

It is not yet known how members of the relevant Verkhovna Rada standing committee will react to the new presidential initiative. No one knows if they will be wise enough not to turn the body, which controls Ukraine's monetary system, into a mini-Verkhovna Rada, with all that this implies. We hope the People's Deputies will have no problems with wisdom, with due account of a forecast by Deputy Speaker Adam Martyniuk that Parliament "will, in all probability, not support the President's proposal to make amendments to the law On the National Bank of Ukraine, which deny the NBU Supervisory Board the status of its highest ruling body."

VIEWPOINT

In last September, Viktor Gerashchenko took for the second time the chair of post-Soviet Russia's chief banker. Among the principal reasons for this appointment is his tremendous experience of working in the USSR banking system, including management of a foreign bank. We think it interesting for the reader to know the opinion of a Soviet-school professional about the new law On the National Bank of Ukraine supported by the Left majority of our lawmakers and envisioning the Supervisory Board as the bank's highest ruling body. The Chairman of the Bank of Russia comments:

"I would say that no such organization of a central bank exists in any other country, neither in those that have passed the initial path of market-economy development nor in so-called emerging-market countries. Rejection of such principles is partially based on world experience gained after studying the regular development of banking systems and the work of central banks. Thus in the system of any central bank, responsibility for the stability of the national currency, prices, etc., still lies with the people who actually work in the bank, and not members of some non-governmental or supervisory board. As I understand it, in making decisions for the bank members of the Supervisory Board bears no responsibility. I think this only makes things worse. And, in my opinion, ongoing processes in Europe (and we are not indifferent to them), including those aimed at creating a common economic space, a single currency, and a single European bank, show that the importance of people working on the bank's board of governors is higher than that of any other coordinating or any kind of scientific boards.

"There was an experience like this with the USSR State Bank in the 1930s: a similar board, consisting of many ministers, was set up after the credit reform of 1929-1930, consisting of 30 persons. But it became clear very soon, even under that, I would say, severe system of state planning and Party responsibility, that this body simply could not work. Thus here I think we are sailing into the unknown. In my opinion, as I understand the materials I saw and read, and judging by conversations with your bank's representatives, this decision is in general even unconstitutional.

"Unfortunately, such attempts are also occasionally taken in our Duma and the Federation Council, whenever some sectors, regions and cities want to solve certain current problems by having such an organization or such a system of central bank management when you can keep the dog on a tight leash, i.e., make somebody do what he is told today, taking care of a certain concrete case and specific region, without caring about a stable national currency in the interests of all members of society."

"You said that world practice knows no precedents of forming supervisory boards of the type formed for the National Bank of Ukraine. But this is rather an elusive answer. Could you tell me what you would do if you were Mr. Yushchenko or how would you react if the Russian Central Bank were supplemented by a board, with half its membership appointed by the Duma and the other half by the President, which would impose on you a monetary policy and approve all your deals worth over $2 million? How would you work under such conditions?"

"Well, we've got a board... What's its name? I forgot. This getting a little off the track. It is a generally useful body for exchanging opinions, listening to unprejudiced criticism, and perhaps to making certain changes in the decisions of the Central Bank's Board of Governors. But this should be an oversight, consultative board.

"As to personally Viktor Yushchenko or Viktor Gerashchenko, you see, we are in different situations. For I am in Moscow and of pension age, but he is not."

"Since the law On the National Bank has already been passed, and the prospect of making amendments to it can only be considered hypothetically, we have to forecast the situation on the money market, proceeding from this version of the law."

"But you, as citizens of Ukraine, can turn to the Constitutional Court to recognize this law as unconstitutional."

"Under the law passed, the NBU finds itself in the very heart of political conflicts. What do you think should be the role of the central bank chairman under such conditions? Can one hope that structural changes in the bank management will not affect the bank's ability to function like clockwork?"

"In general, a clock is a precise instrument, while the activities of a central bank in any country is an even more intricate mechanism. I remember very well the words of Alan Greenspan, head of the US Federal Reserve System. I asked him: 'But why is one of Federal Reserve's tasks to provide employment to the population? You are not the Department of Labor!' He answered: 'Viktor, we are not part of the government, but we are in the Administration. And on-going economic processes - inflation, the related unemployment, and changes in the cost of living - are, in the long run, the objectives of the monetary policy pursued by the central bank.' So, on the one hand, a bank should not be politicized. But, as a rule, each President sends only his favorite economists to the Federal Reserve, while he is in office for four or eight years. Naturally, their policies become harder or softer depending on whether presidential elections are coming on. But the main thing is what kind of economic situation exists in he country and whether or not the national currency is stable. It is important for them as the central bank that a satisfied voter should go to the polls."

Moscow-Kyiv