Any crisis, whether in the banking and broader financial sector or the social and political sphere, is preceded by a series of bad decisions made by decision makers. What is special about the current crisis? I call it “The effect of the three “D”: the devaluation, distrust and de-sovereignization.
The devaluation is a process in which the national currency loses its own value, which immediately affects the banks and their clients. The current devaluation in Ukraine, in my opinion, is based on two pillars: the wrong actions and wrong monetary decisions of the previous executives of the National Bank of Ukraine and the imbalance of the economy in the current circumstances. After a terrible devaluation-inflation spiral of 2014-2015, level of confidence in the national currency, and, hence, in the National Bank, and in the local banking system is low as never before and it continues to fall. We should also consider the questions of war and peace, which cannot be withstood by the banks.
Banks cannot seriously impact the paying capacity of customers. The crisis of non-payments and is hanging as Damocles’ sword not just over the process of crediting and deposit funding under chronic outflow of deposits, but after the collapse of liquidity gradually paralyzing the calculation and payment function of banks, leading to destructive distrust. This is not even the domain of the National Bank, but of external geopolitical forces – the creditors and donors of Ukraine, in particular, the International Monetary Fund and foreign donors who have already done much to prevent our sovereign default in 2015.
After the completion of the historic “debt operation” in 2016, it is necessary to take a series of “super governmental” solutions to launch a real “Marshall Plan” and not torture Ukraine with shifts of tranches and new little achievable “beacons”. In my opinion, combating corruption, the real exchange rate stabilization, the fight against inflation and structural reforms are unrealistic without external funding of cash deficiency of the state budget in 2016 and 2017. Hence we observe the third component of the current crisis: de-sovereignization, when our state loses some formal sovereignty and certain opportunities.
Will some external elements of control, which we can all witness today, be useful? Quite possible. The post-war experience of Japan has clearly demonstrated that demolition of the former management model, including the de-monopolization of the economy, can play sometimes a decisive role.
It is important to understand (and even more importantly, to make correct conclusions) that the current banking crisis in Ukraine has its historical analogues around the world – in Europe, and especially in Latin America. Most of them, as now in Ukraine, developed gradually – from credit boom to the devaluation shock. Unfortunately, but in Ukraine we have seen a standard set of erroneous actions of the central bank and the government: maintaining a fixed exchange rate, and then sharp devaluation, undermining the basic institution of the banking system – the credibility of the local currency. This process I call “banking distrust” – when the population under any pretext whatsoever, in any currency and in any of bank would not deposit investments, thus supporting the outflow of deposits from the system, fearing the inability to withdraw their funds, even at the time of expiration of the deposit agreements. The important role is played by the new transformed National Bank as a future mega-regulator of all the financial market and Deposit Guarantee Fund as a channel to ensure flow of funds into the real, even if it is now a semi-shadow economy from semi-collapsing banking system through the citizens who have received such compensation. Then it is important to ensure cash flows arising at first in the state-owned banks, and then in the rest, if and when the confidence returns.
The above reasons resulted in certain transformation and launched a process of concentration of banking capital, redistribution of the market, and division of the Ukrainian banking system into 4 large groups:
1) national champion – the only real savings bank “PryvatBank” and private banks with Ukrainian capital, which cannot really be its real competitors;
2) foreign non-Russian banks, which did not leave our market in time;
3) Ukrainian state banks (Oschadbank, which announced the plans to become a bank No.1 in Ukraine, as well as current and purchased banks with state participation (in the new process of nationalization, recapitalization);
4) Russian state-owned banks in Ukraine (which in spite of a serious outflow of funds from them, do not plan to leave the Ukrainian market).
The rest of the niche, captive, and settlement banks which will remain after the collapse of most of the former middle-financial-industrial groups are unlikely to survive in 2016. The number of banks will decrease, and the survivors will become stronger leaders. However, any crisis tends to end. I suppose that after overcoming the current collapse, the financial system of Ukraine will be even more bank-oriented. The local capital market and insurance intermediaries and private pension funds will not compete with the banks for many more years, and to say more, this is not provided even in the current Reform Program until 2020.
Banks should not focus narrowly only on current struggle for survival, they should now actively adapt to the requirements of high-tech future and offer high-quality banking services to their up-to-date customers, but in the new “digital” wrapper.
The new technological revolution is now the reality of banking. So they should move fast in this race of electronic retooling. Otherwise, they will be on the margins of the banking system and play role of a financial supermarket with stale bank products. Many will go bankrupts in the process of the crisis due to lack of funds for investments in new platforms, and then will be sold out or leave the market. And those banks who want to lead should carefully approach the issue of banking services “in one or two clicks” on the new information and communication platform. It will not be possible to drive Ukrainian pensioners into the happy world of the new financial virtual reality, and a cruel fact of demographics is that our population is aging. Offline banking will never completely disappear. In my opinion, those powerful, technologically advanced players, who treat the inevitably impending “Matrix” of a new financial reality without excessive fanaticism, will form the core of the post-crisis Ukrainian banking until 2020.