When outgoing Ukrainian National Bank Governor Valeria Gontareva announced her resignation in April, she said it was a case of “mission accomplished”. As NBU Governor, she oversaw the most intensive reformist drive in the history of Ukraine’s banking sector. What are going to be the key legacies of Ms.Gontareva’s tenure?
History will judge Governor Gontareva’s NBU tenure and only the passage of time will determine her ultimate legacy. However, we certainly have her to thank for the huge efforts undertaken to modernize the Ukrainian banking system. It important to remember that this process has taken place amid a climate of enormous difficulties in the country, with a war in eastern Ukraine, massive GDP losses, and a very challenging situation with the level of Central Bank reserves. Despite all this, the banking system has not only survived, it has actually became much stronger. There is still much to do, but I would identify a number of significant achievements. These include cleaning the banking system of “zombie banks” and introducing transparent capital requirements – a development which has provided clarity for both local and international banks. Ms. Gontareva managed to improve the way the central bank itself works, creating a more modern approach to the organization of the NBU’s functions. She was also a courageous NBU Governor. It is crucial for the financial sector to have the appropriate supervision, and she applied the regulations despite knowing that this would be painful medicine for many in the banking sector. It took a lot of courage. It required the ability to say no.
What are the key future reform priorities for the Ukrainian banking industry?
A definite priority is securing creditor rights. If we want to create the conditions for an expanding Ukrainian economy, we must make sure that Ukrainian businesses have secure access to credit. This also means making sure creditors themselves receive sufficient protection. There has already been some progress in this direction but there is still a long way to go. Other key focuses include keeping the macroeconomic situation under control, making sure inflation is contained, and creating the conditions for a stable exchange rate. In broad terms, the most important challenge is keeping the banking system strong and making sure it continues to develop. Huge legislative work lies ahead. Many, many laws need to be changed. Some are currently under consideration at the Ukrainian parliament so much will depend on the ability of MPs to pass the necessary legislation.
What will the recent banking reforms mean for the development of the broader Ukrainian economy in the coming years?
I think we have already achieved liquidity in the system. Banks now have enough money to ensure new lending. If there are good rules put in place, the money will reach the economy and fuel new growth. To make this happen, we need to make sure that we have the right regulations. However, even this will not be enough. We also need to see a return of business confidence. Banks can provide the financial support required for a new wave of economic expansion, but people themselves need to act as the catalysts for new business development. People must realize that it is perfectly possible to create new businesses in challenging conditions.
The closure of over 80 banks during the reform process has badly damaged consumer confidence in the Ukrainian banking sector. What can be done to rebuild faith in Ukraine’s banks?
As far as I am aware, more than 90% of account holders affected by the recent spate of bank closures got all their money back, so they really have no reason to complain. Those who did lose their deposits must learn to make better choices. No investment comes without risks. If they chose a bank offering 12% interest over 3% interest, then that also involves accepting a certain level of risk. My advice to Ukrainian society as a whole would be that it is worth learning more about investment risks.
In terms of concrete measures, I think it would be a good idea to expand existing State Deposit Guarantee Fund protection to include small businesses in addition to individual depositors. When it comes to larger multinational companies, they have the resources to take the appropriate risk management measures. If they fail to do so, then we are talking about a lack of professionalism. To achieve this, Ukraine can simply cut and paste from existing legislation used within the EU. This issue is currently not on the agenda, but I am sure that it would receive widespread support among the banking community. The key is to avoid procrastinating and to seek rapid implementation.
How secure are the current Ukrainian banking sector reforms - is there a threat that they could be reversed?
We must pray that we have learned the lessons of the recent past. Ukrainian society is currently paying for the ugly practices of the last 25 years, and this is not limited to the financial sector. Are the current reforms irreversible? It is impossible to rule anything out. I do not personally believe Ukraine will witness a return of “zombie banks”. Nevertheless, there will always be people who want to go back to the “easy business model” of the past. The real question is whether society will allow this to happen. Has society learned from the experiences of the past three years? If not, there is a danger we will see the same mistakes once again. We will then have a second chance to learn, and so on. Repeating the process is not a problem – but it is more expensive that way.
About the interviewee: Taras Kyrychenko is the Chairman of the Management Board at Pravex Bank (Intesa Sanpaolo Group) and Co-Chair of the American Chamber of Commerce’s Finance and Banking Committee