Business in Ukraine

Against the backdrop of the global financial crisis, little heed was paid to the news released on 5 November by the Association of Ukrainian banks (AUB) about a meeting the AUB Board members and CEOs of the AUB member banks had a day before with NBU Governor Volodymyr Stelmakh and his First Deputy Anatoliy Shapovalov.

According to the AUB report, while discussing the current refinancing procedure, the Association Board members insisted on providing all banks (irrespective of their authorized capital) with equal access to operative re-financing facilities stipulated by NBU Resolution #328. It was also mentioned in passing that “the discussion of the AUB proposals was fairly emotional; the parties wanted to hear each other, yet not always succeeded in achieving this goal.”

As a meeting participant told ZN, the latter quotation was a gross understatement of the passions running high at the meeting between the NBU top managers and bankers.

Another serious showdown occurred on Thursday at the meeting of the NBU Supervisory Board. Representatives of the NBU Management Board reproached Petro Poroshenko, chair of the supervisory board, for exceeding his authority when attending to the needs of Prominvestbank. Mr. Poroshenko demanded that all such allegations be withdrawn; otherwise, he threatened to tender his resignation immediately, announcing it publicly at a press conference scheduled for the end of the meeting. He also warned about possible recriminations against the NBU management, allegedly engaged in exchange rate manipulations and providing selective access to the NBU refinancing.

What were the reasons for high passions and the scandal that followed?

It is no secret that the banking market is struggling to improve liquidity (i.e. to find cash). First, deposits are no longer a reliable source of money. Second, foreign borrowing has become practically unavailable to Ukrainian financial institutions. Third, the inter-bank resource market is almost non-operational. Whereas in August, for example, the annual trade never dipped below UAH 5 billion (sometimes amounting to UAH 7.5 billion or more), over the last couple of months it has shrunk to a little more than UAH 3 billion. The reason is that cautious bankers, should they get hold of free liquidity, prefer to keep it for their own needs.

The balance on banks’ correspondent accounts in NBU has been sinking since 10 October when it exceeded UAH 20 billion. As of 31 October, it had plummeted to a record-low level of UAH 11.8 billion, hardly covering the mandatory provisions set at about UAH 11 billion.

According to the NBU data, the average weighed inter-bank rate on that day reached 28.6%. In some cases the money market rates were as high as 50% per annum.

In November, the situation has not improved: on Friday morning, the balance on banks’ correspondent accounts was under UAH 13 billion; the average weighed inter-bank rate calculated by NBU has been steadily over 25% per annum (in many cases, the “mass market” rates are even higher).

Under the circumstances, the only source of funding for banks is NBU refinancing. However, as many bankers would argue, it is difficult to obtain, even though the NBU’s management declared ensuring liquidity of the banking system to be the regulator’s top priority.

Why is it so? Most probably, the National Bank is at a deadlock, facing the need to provide liquidity to the banking system, on the one hand, and to maintain the hryvnia/dollar exchange rate, on the other. It sees no painless way of ending the deadlock. The extensive refinancing of banks in order to support their liquidity is tantamount to printing large amounts of new money, which eventually flows onto the currency market, adding pressure to the unsteady exchange rate.

The national Bank has to resort to large scale interventions in order to sustain the exchange rate, selling currency reserves for commercial banks’ hryvnias, which automatically withdraws the latter from circulation. As a result, the banking system looses free liquidity. Last month, the NBU intervention on the currency marker amounted to USD 4 billion. At the same time, it withdrew UAH 20 billion from circulation, which will have to be offset by refinancing. A vicious circle has emerged.

It should be broken, as reserves are dwindling rapidly. In October they decreased by USD 5.6 billion (about 15%) to USD 31.9 billion as of 31 October.

A sensible market-oriented solution would be to stabilize the exchange rate and make hryvnia short in supply and, thus, fairly expensive in the domestic market (in terms of interest rate) so that it would not be advantageous to sell it for dollars. According to analysts’ estimates, the hryvnia-denominated interest rate should rise to at least 25%-30%.

Thanks to case-by-case management and administrative restrictions, the National Bank has stabilized the currency market situation. Yet the NBU is also confronted with the grave and imminent threat of resource market paralysis. It is clear that the banking system cannot feel comfortable about liquidity with the 30% interest rate. It is also clear that the demand for NBU refinancing (which is twice as cheap) will surge under these conditions.

The NBU refinancing rules are established in the Guidelines on Regulation of Ukrainian Banks’ Liquidity by the National Bank (Resolution # 378 of 26 September 2006). As per the document, banks that cannot boast large portfolios of government bonds and regular revenues in foreign currency could (until recently) get long-term (up to 12 months) NBU refinancing either through participating in tenders for supporting bank liquidity or through applying to NBU for so-called “stabilization loans.”

Banks considered the latter option to be the last resort since stabilization loans are extended as a “measure of financial institutions’ rehabilitation.” The accompanying procedures are cumbersome and distressing, and the very fact of application mars the bank’s reputation indelibly.

Spiteful tongues argue that a lot of the refinancing loans made by NBU in October could qualify as stabilization loans. The applicants, however, were prepared to borrow at any price and on any terms to avoid getting into the category of stabilization fund users.

The NBU refinancing tenders – the former option – are held weekly but it is only once a month that the regulator offers annual resources. The abovementioned Guidelines list a wide range of financial instruments that the bidding banks can pledge as collateral to get refinancing.

On the face of it, everything seems simple: if you need money, you should take part in the tender. Yet the devil is in the details. Few banks have high-liquidity securities (government bonds, NBU deposit certificates or municipal bonds) in their portfolios, while other types of collateral have to meet additional requirements, and bureaucrats can always challenge their eligibility. Those who still think bureaucrats can be sympathetic should try and collect the necessary package of tender documents…

The liquidity regulation guidelines also require that every bidding bank provide only homogeneous collateral, i.e. either government bonds alone or deposit certificates alone, etc.

As matters stand, bank portfolios of securities are scanty: as of 1 October 2008, their share in bank assets was slightly over 4%. Therefore, not all financial institutions can afford forming appropriate collateral for every tender. NBU experts concur that most banks lack liquid securities. According to them, only 12 out of the 17 largest Ukrainian banks (and 49 out of 181 banks operating in the country) had securities eligible for NBU refinancing in their portfolios.

The latest refinancing tender took place on 6 November: 48 banks obtained refinancing in the amount of UAH 3.8 billion. According to NBU statistics, at the tender held on 8 October about 20 banks received UAH 1.655 billion for 359 days at the interest rate of 16.8% per annum. Put bluntly, each of them got “crumbs.”

In view of the liquidity problem, the NBU issues a notorious resolution (#319 of 11 October 2008), which, inter alia, imposed a ban on the pre-term withdrawal of bank deposits. Clause 1 of the resolution spelled out the regulator’s commitment to “broaden opportunities for maintaining liquidity due to financial rehabilitation programmes.”

The list of eligible types of collateral was expanded, indeed. However, this provision proved useless to most banks as it referred to the “financial rehabilitation programmes” which banks fear like death. On 16 October, the NBU issued Resolution #328, which could have become a magic wand to banks suffering from liquidity shortages. Financial institutions were given a long-awaited chance to receive so-called “operative refinancing” from the regulator.

Resolution #319 was supplemented with a provision enabling banks “to apply to the National Bank for liquidity enhancement” should their deposit amounts fall by 2% within five working days. The terms and conditions include the instantaneous submission of a duly formalized agreement of pledging shares of the respective bank’s major shareholders to the National Bank, which is a pledgee under this agreement.

Very soon, though, to the bankers’ bitter disappointment, a series of explanatory letters followed. One of them (#14-011/3668-14302 of 22 October 2008) clarified Resolution #328, whereby NBU undertook to consider “loan applications only from those banks, which are incorporated as open (public) joint-stock companies and have the authorized capital of UAH 500 million and more.” The new requirement was substantiated with the good intention to “facilitate the increase in banks’ capitalization and urge bank shareholders to work towards this end.”

The crux of the matter is that only 25 banks operating in Ukraine as of 1 October 2008 can meet the minimum authorized capital criterion. The NBU knows this perfectly well. Excluding banks incorporated as closed (private) joint-stock companies and limited liability companies, one will get less than a score of financial institutions, most of which (12) are subsidiaries of foreign banking structures that are not in need of NBU operative refinancing.

The remaining 160 banks (88.88% of Ukrainian banking system), most of which represent national banking capital, are supposed to handle their problems independently. Under the current situation, this means that these banks might need to approach the National Bank for stabilization loans.

Considering such a possibility, the next regulative act of the National Bank (the 353^rd one) prescribed including property rights that banks acquire for issuing substandard credit loans into the list of possible collateral for its refinancing loans.

When during the meeting with the heads of the National Bank the bankers demanded an explanation as to why 160 Ukrainian banks were discriminated against, they were told that the board of the National Bank, which would examine requests of operative refinancing, might not be able to cope with their probable amount.

A high-ranking official of the NBU blabbed out that the National Bank is first of all worried about the 17 biggest “backbone” financial establishments (first group) which are accountable for 60% of assets of the banking system. All the rest will have to take part in tenders according to the general rules or employ stabilization procedures.

However, when the officials heard the question “Is that an official position of the National Bank and does it mean that the National Bank is not concerned about the remaining 40%,” they retracted these careless words.

It is no secret that the largest banks were the first banks affected by crisis and that they approached the NBU for help. The bankers are outraged by the fact that the status of “backbone” allows them to solve the problems on more favorable terms than the rest of the banks.

On Tuesday, just before the next tender on refinancing, the NBU informed the banks of its decision to include into the list of possible collateral for its refinancing loans property rights that banks acquire for issuing standard credit loans.

The reader might say that the NBU has actually extended the list of collateral for its loans. Yes, but the thing is that the opinions of the officials and the bankers’ opinions on which loan can be considered to be standard might differ a lot.

One of the bankers, speaking on condition of anonymity, explained the situation as follows: “The problem is that the current regulative acts on the terms of long term refinancing are composed to let the officials to make final decision on whether or not to issue a loan. A reason to refuse refinancing can be found very easily. This makes the current situation and system ripe for various abuses and corruption. There are rumors that it is possible to solve the problem with refinancing and it costs a definite sum of money. Therefore, it turns out that those bankers that know how to “solve problems” at the necessary level can receive more favorable terms at the expense of the others.”

Tags: Finance //