Regulatory framework in emerging markets: outlining

the crises impact

Prof. Iryna D’yakonova, Ukrainian Academy of Banking, Ukraine

&Tatiana Scherbina, Ukrainian Academy of

Banking, Ukraine

Aims

• Investigating the affects of the economic crisis (2007)on Banking Supervision in developing countries

• Identifying specific features in Ukrainian regulative framework

Banking Supervision Systems in EU’s countries

Country Model

Sectoral Task-oriented Mega-regulator

Austria +

Belgium +

Greece +

Denmark +

Estonia +

Ireland +

Spain +

Italy + +

Cyprus +

Latvia

Lithuania +

Banking Supervision Systems in EU’s countries

Country Model

Sectoral Task-oriented Mega-regulator

Luxemburg +

Malta +

Germany +

Netherlands +

United Kingdom +

Poland +

Portugal + +

Slovakia +

Slovenia - +

Hungary +

Finland +

France + +

Czech Republic +

Swiss +

Bulgaria +

Romania +

The Financial Architecture in some countries according to the structure

index Place Bank-oriented architecture Market-oriented architecture Bank-oriented architecture Market-oriented architecture

Developed countries Developing countries

1 Panama Netherlands Bangladesh Denmark

2 Tunis Thailand Nepal Peru

3 Cyprus Canada Egypt Chile

4 Portugal Australia Costa Rica Jamaica

5 Austria Republic of South Africa Barbados Brazil

6 Belgium South Korea Honduras Mexico

7 Italy Swiss Trinidad and Tobago Philippines

8 Finland Great Britain Mauritius Turkey

9 Norway Singapore Kenya -

10 New Zealand USA Ecuador -

The Capital Structure of Banking System, 2004

Ukrainian banks 90%

Foreign owned banks

10%

Main indicators of banks activity in groups according to source of capital origin as on

01.07.2010 (bil. UA)

 № CriterionUkrainian

banks 

which includes:Banks with

western capital

 

Banks with Russian capital

 

Total State owned banks

Private owned banks

  Number of banks in group 115 5 110 39 10 164

1 Total Assets 431,11 152,69 278,42 367,59 78,62 877,31

  Group ratio, % 49,14 17,40 31,74 41,90 8,96 100,00

2 Net worth 77,60 38,13 39,47 38,25 9,71 125,56

  Group ratio, % 61,81 30,37 31,44 30,46 7,73 100,00

3 Loan portfolio 312,32 106,48 205,84 295,46 63,34 671,12

  Group ratio, % 46,54 15,87 30,67 44,03 9,44 100,00

3.1 including consumer loans 55,58 11,14 44,44 135,20 8,68 199,47

  Group ratio, % 27,86 5,58 22,28 67,78 4,35 100,00

Growth of banks external debt (bil. USA)

31

39

1,7 2,6

6,2

13,9

-

5

10

15

20

25

30

35

40

45

01.01.2004 01.01.2005 01.01.2006 01.01.2007 01.01.2008 01.01.2009

Structure of loans

Population 16%

Non-financial corporations 84%

Non-financial corporations

61%

Population

39%

by the end of 2004

by the end of 2008

Bank loans according to source of capital origin

61,2 99,4

147,4

199,6

368,3

321,3

1,1

312,3 301,1

206,7

307,4 295,5

15,2 27,1

89,7

2,1 4,2 17,6 39,2

62,6 63,3

0

50

100

150

200

250

300

350

400

2004 2005 2006 2007 2008 2009 І півр.2010

bil. hrn

І- banks with Ukrainan sourse of capital origin

ІІ - banks with western sourse of capital origin

ІІІ - banks with Russian sourse of capital origin

Background for the crisis:

- total dollarisation of the economy;- increase in the share of foreign capital in the banking system

to 40%;- foreign currency loans;- inadequate growth in consumer lending (over 100% per year),

mostly in foreign currency;- insufficient crediting at reasonable interest rates of the real

economy;- excessive external debt of corporate and banking sectors,

which exceeded the external debt of the state almost in twice;- artificial strengthening of hryvnia to U.S. dollar in the summer

of 2008;- negative trade balance.

Ukraine banking structure pre and post economic crisis

• The world crisis in Ukraine started in financial sector and then spread through the rest of the economy.

• Flight of deposits and high level of corporate debts caused to the lack of liquidity in Banking system

• Exchange devaluation followed by inability to provide stable servicing the loans.

Banking regulation in Ukraine pre-crisis• The banking system of Ukraine consists of the National

Bank of Ukraine (NBU) and other domestic banks and subsidiaries of foreign banks operating in Ukraine

• The banking system enjoys a strategic position in the economy, which is explained by its major functions such as:

securing the stability of the national currency; accumulation and redistribution of financial resources of the general population and companies into credits and investments; regulation of supply and demand of money in the economy; organization and harmonization of payments in the economy.

Board of directors on banking regulation and supervision structure till 2008

Department of banks’ registration and

licensing

Department of banking regulation and supervision

Department of banking methodology regulation

and supervision

Department of banking activity expiration

Department on the matters of banking system usage for the

legalization of criminal income and terrorism financing

Board of directors on banking regulation and supervision

Organizational structure of banking regulation and supervision of the Central Office (Bodies) of the

National Bank of Ukraine as at 12.03.2011

Deputy Head of the NBU

General department of banking supervision

The regulatory and methodological support for

banking regulation and supervision department

Financial Monitoring department

Foreign exchange transactions control, methodology and licensing department

Banks registration, licensing and reorganization

department

Legislative changes

• requirements to the commercial banks in the field of banking activity regulation

• determining the order of state participation in banks capitalization

• complex of measures for providing stability of the banking system in a period of financial crisis

Deposit protection scheme

• The Deposit Guaranty Fund is created for protecting the rights of individual depositors (natural persons) in 1998

• The participants are domestic commercial banks and the branches of foreign/international banks in Ukraine

Changes in deposit protection

• the size of compensation is increased from 50 000,0 to 150 000,0 of hryvnyas

• NBU pays annual contributions to Deposit Guaranty Fund

• the Fund has an ability to be credited by NBU on refinancing interest rate terms

Key questions in Baking Supervision:

• Lack of independence – institutional – operational – financial independence

• Regulatory structure– Ukraine – without considerable changes after

crisis– What framework is better?