OREANDA-NEWS. February 19, 2010. It has been more than a year since the Ukrainian financial sector was hard hit by the global financial turmoil. Suffering from a massive run on deposits (resulting in a 25% reduction of the deposit base) and a rapid growth of non-performing loans triggered by the nearly 60% devaluation of the local currency against the US dollar and a 15% decline in GDP, the banking sector of Ukraine faced severe financial damage, leading to significant capital erosion and the recognition of UAH 38.5 bln (USD 4.8 bln equivalent) loss in 2009, reported the press-centre of World Bank.

The Bank’s response was multi-faceted, focusing on four main areas: (i) banking sector recapitalization and restructuring; (ii) resolution and consolidation of the banking system; (iii) strengthening the deposit insurance payout functions; and (iv) enhancing the legal and regulatory framework for bank resolution.

After a year of intensive work, it was time to take stock at the end of 2009 of what has been achieved and what challenges remain ahead in 2010 and beyond. In order to create a platform for public dialogue and help form a consensus on the challenges and key priorities for the financial sector reform agenda, the World Bank initiated a series of events with wide stakeholder involvement: leading experts of the banking system in Ukraine, financial regulators, government officials, professional organizations and think tanks.

Seminars and round tables were held during the past few months on topics such as resolution of non-performing loans, future role of the Deposit Guarantee Fund, and financial sector development priorities. The Bank was also present in financial press clubs, provided regular commentaries and articles in the media, and held special media briefings for journalists on financial sector issues. The work was underpinned by numerous brainstorming meetings with key policymakers and the donor community.
 
“The seminars and roundtables served as great opportunities to engage diverse stakeholders in consensus-building discussions on the future of the Ukrainian banking system.- says Marius Vismantas, World Bank Financial Sector Coordinator for Ukraine, Belarus, and Moldova. - Coordination of the crisis response in 2009 in the midst of continued political backlog has been challenging, therefore having a broad consensus on the future vision for the financial market among the policymakers and market participants is indispensable for success of the reforms.”

Participants in the various discussions agreed that the stabilization of the banking sector achieved in 2009 remains fragile. Comprehensive reforms are still needed to clean and consolidate the banking sector and regain the trust of depositors and savers, so that lending can resume. The financial sector is key to economic recovery, but it also depends to a significant extent on improvements in the real sector. Without a return to sustained growth, banks will not record fast improvements in the quality of their assets and earnings, and without such improvements, banks will remain hesitant to lend. The solution lies in completing the bank rehabilitation strategy, streamlining toxic asset resolution and corporate restructuring, and in parallel creating the conditions for a revival in investment demand.

‘We cannot overestimate the importance of the financial sector rehabilitation for our country” says Yuriy Skolotyaniy, Zerkalo Nedeli’s Deputy Head of Economics Department.
Moreover, he adds “For example, a conservative estimate of the price of the toxic assets currently held by banks is comparable to the size of the national budget of Ukraine. Effectiveness of measures taken today will largely determine the further development of the domestic financial system for many years ahead. It is obvious, that many of the recovery prescriptions could be and will be unpopular not only among the public at large, but even among Ukrainian decision makers, as well as market players. That is why public oversight and public discussion of the decision-making processes, and the decisions taken, are extremely important; without public acceptance, social outcomes of the decisions may have undesired effect.”

The topic of the rehabilitation of the financial sector is very sensitive, given the nature of banking business. Public debate and a constant flow of communication from the authorities are critical to rebuilding the trust of the population in the banking system, and in the resolve and ability of the authorities to tackle the challenges presented by the crisis.

 “Ukraine is a very open society with an evolving culture of vigorous debate.- says Martin Raiser, World Bank Country Director for Ukraine, Belarus and Moldova. – We want to help forge a consensus around the critical reforms that Ukraine needs to get back on track. With our partners in the financial sector, initial steps in this direction have been made. And we are so encouraged by the professionalism and drive of those with whom we have worked to create a platform for discussion in recent weeks and months. We hope this momentum will be sustained and will serve as a model for other sectors, facing similarly severe reform challenges. Our basic message is: reforms can be popular if they are properly explained.”

Related information:
The World Bank, together with other IFIs, has strongly supported the anti-crisis measures by the authorities. The Bank’s assistance in the financial sector resulted in the first Programmatic Financial Rehabilitation Development Policy Loan (PFRL 1) for Ukraine in the amount of USD 400 million approved by the Board of Executive Directors in September, 2009. PFRL 1 is the first in a series of planned two development policy loans designed to address the impact of the financial sector crisis in Ukraine. PFRL 1 aims at preserving the core banking sector in the face of the ongoing crisis, while PFRL 2 will aim at restructuring the sector and enhancing the legal and regulatory framework to make it more resilient to future crisis.