Ukraine Banking – how to make it safer for years to come

1. Ukraine Banking – how to make it safer for years to come “We need good brakes in order to drive fast!” Marius Vismantas Country Sector Coordinator, Financial and Private Sector Development Ukraine, Belarus & Moldova The views expressed in this presentation do not constitute an official position of the World Bank Group on the issues discussed

2. Taking a look to the future Ukraine slowly following others and repeating mistakes? Or Ukraine leading and building a transparent financial market with safety and depositor & taxpayer protection measures at the fundament?

3. Taking a look to the future • Bank capital adequacy to go up • Ukraine presents higher risks than many other countries • Failing banks – without a strong capital base/back-up • Capital required from banks should be commensurate with country risk – it just cannot be at the same level as in developed financial markets • Countercyclical measures (e.g., dynamic provisioning) imperative to build reserves in normal times We need good breaks in order to drive fast!

4. Higher capital • Would reduce the need for borrowed reserves • Would increase public confidence in banking system • Would give better motivation to bank owners to manage risks • Would substitute for the lack of institutional capabilities

5. Taking a look to the future • Capital will be more expensive • Ukraine’s Loan/Deposit ratio at 200% is among the highest is the region – serious imbalance • Financial system lacks back-stops • Nowhere to spread the risks – no capital markets to speak of • There is nobody to buy the stock of NPLs – neither public nor private sector is not ready for such magnitudes; banks will have rely on their shareholders • Pressure on the need for external (especially short-term) borrowing and fight for deposits has to go down

6. Taking a look to the future • Strength of the regulator is a significant factor in the cost of finance • All banks are small enough to fail – good framework of dealing with failures is key • Regulator respected and uncompromizing

7. Taking a look to the future • Cheap energy resources lead to climate warming • Cheap unhealthy foods lead to health issues • Cheap, easily accessible finance leads to debt hangovers Cost of low-cost finance – without fundamentals firmly in place - is too high!

8. Taking a look to the future By 2015 and beyond - Consolidated, Stable, Competitive, Transparent, Well Managed, Client-Focused • Consolidated • fewer yet stronger banks • Stable • capital base stronger than in comparable EU/OECD countries, reflecting higher risks of doing business in Ukraine • smoothed development with no up/down excesses • Competitive • share of top 3/5/10 banks below international averages • level playing field for all banks operating in the country • entry barriers high, exit barriers low • rules of the game tough and enforced • All banks small enough to fail.

9. Taking a look to the future By 2015 and beyond - Consolidated, Stable, Competitive, Transparent, Well-Managed, Client-Focused • Transparent • ultimate controllers known to all • supervision consolidated • IFRS in place and fully functional • Well-Managed • fit and proper managers and especially controllers/supervisory board members • independent membership in bank boards strongly encouraged • regulator respected, fair in level treatment, yet ruthless in enforcement of rules • Self-governing banking community – deeply caring about the fundamental ethics and reputation of the profession • Client-Focused • consumer protection rules to reduce information asymmetry • banking ombudsman operational and respected