The National Bank is gradually changing its assessment of the financial crisis in the banking system. A couple of weeks ago, the management assured that after the crisis of 2014-2016, it had formed a sufficient amount of capital, and was ready for almost any perturbations and would not suffer much from the consequences of the coronavirus pandemic. However, in the end, everything turned out to be completely different.

The NBU was forced to admit it in the latest report ("On Financial Stability" in mid-June 2020). It openly says: in order to cover their losses, banks will need UAH 10.3 billion.

This figure does not include the entire banking system, but only a third of the banking sector. The National Bank checked 26 out of the 75 banks operating in Ukraine and discovered that 9 of them may need additional capitalization. It is every third one that was tested.

Two out of the nine non-capitalized banks are government agencies. It means that additional capitalization will be carried out of the pocket of the general public. Shareholders of the state banks are the people of Ukraine, and Ukrainians will have to pay for their financial problems. The funds will go from the state budget, which will affect the provision of social services, medicine, infrastructure, or any other direction that will not receive any financing. It will be designated to the state-owned banks instead.

Everything is already clear from the results of the current check-up. In addition, this is not a standard National Bank’s stress test with a significant number of checks, cross-checks, and incidental testing. Far from it. It is called express stress testing at the National Bank because all checks and inspections were stopped during COVID-19 quarantine. So this is a superficial assessment that shows only general data. It requires capitalization of every third bank checked - that amounts to nine in total.

Surely, when they check more thoroughly and request additional reports, even more problems will appear. Especially when they inspect not only 26 banks, but all 75 operating in the country. This is confirmed by the National Bank’s general conclusions on the situation in the financial market, which are included in the same report:

• The growth of real incomes of the general public has stopped, and salaries will not grow. Unemployment has increased by one and a half times and may further increase.

• The volume of deposits in the banking system is declining, especially term deposits.

• Over 10% of consumer loans to the general public can never be repaid.

• Credit defaults will influence the Ukrainian economy negatively. The NBU has compiled a list of industries that will be most susceptible to defaults: metallurgy, engineering, retail real estate, and non-food products.

• The volume of cash remittances from abroad to Ukraine has already decreased by 13.2%, and may further decrease due to the reduction in earnings of our labor migrants.

• Banks will lower interest rates on loans, but in fact, they will lend less. Banks will continue to increase their investments in the governmental bonds pyramid, which has already increased quite intensively: by 22% since the beginning of 2020, and reached UAH 410.1 billion [bank investments].

It is just the initial stage and evaluation indicators. National Bank analysts looked at the data only from April to May, so they still do not have a real picture at the end of June.

It has been known that bank managers unofficially admit that the situation is becoming increasingly depressing. Since many enterprises and people are not able to repay interest on loans, for which they even received deferrals and signed restructuring agreements. Banks will reduce this data by mid-July-early August, and will try to maximally delay the submission of full NBU reports, as no one needs problems with the regulator.

There is information from the National Bank about the formation of reserves for new bad debts and an increase in bank capital. The shareholders of the banks simply do not have the funds for this. If they are forced to do this in 2020, bank closures will happen in the fall. And if they give deferrals until the middle of 2021, then there is hope that a number of financial institutions will make it through. However, this does not mean that there will be no bank closures. It is already obvious that this cannot be avoided.

Andrey Pshenichnyi for the site dubinsky.pro