The banking system

THE BANKING SYSTEM

Rise and development of the banking system of Ukraine

The rise and development of Ukraine and the other countries arising on the ruines of the USSR is a unique phenomenon in a modern history. From a single “ ruble zone” the national monetary and banking system have separated into new elements and structures that earlier haven’t existed such as central banks, commercial banks, the national currencies, the systems of payments, currency exchanges etc.

At the stage of transition to a market-oriented economy, banking systems with its infrastructure, methods and tools replaced the command-administrative regulation methods and instruments.

The banking system in a market-oriented economy plays a triune role with the following functions:

• market transactions are accomplished by redistribution of funds between different deposits (the structure of commercial banks)
• direct the savings of the public to firms and commercial enterprises and fulfill the process of investing (banks and financial intermediaries)
• regulate the quantity of money in circulation (central bank)

The rice and development of Ukraine’s banking system has proceeded in extremely adverse conditions like: the destruction of resources with respect to Ukrainian banks as part of a central Russia-based system in 1990-1991; economic crisis; decline of gross domestic product; public attitude.

Banking system: onset of rise and development

The main functions of the National Bank of Ukraine

The National Bank of Ukraine is the central bank? Which pursues comprehensive state policy in the domain of monetary circulation, crediting and provision of the stability of the national monetary unit. At the same time it plays roles of

• the money issuer
• the body of currency regulation
• the body of bank supervision
• the bank of the banks
• hte state bank
• the organizer of inter-bank settlements

 

The NBU pursues monetary-credit policy, establishing and applying appropriate instruments. It keeps the national book of registration of banks currency exchanges and other financial-credit establishments, cooperate with central banks of other countries, international banks and financial-credit organizations.also, NBU enjoys the monopolistic right to issue money and national monetary marks (bank-notes, coins) into circulation.

So, together whith the Cabinet of Minisrers, the NBU

1)draws up the balance of payments of Ukraine;

2)supervises the observance of the limit of foreign debt;

3)defines the limits of foreign-currency denominated indebtedness of authorized banks due to non-residents;

4)accumulates, preserves, and uses the reserves of currency values;

5) issues licenses for providing currency transactions and decides abrogation;

6) defines ways to establishing and using currency exchange rates;

Apart from these regulatory functios, the NBU also fulfills controlling functions. It supervises the observance of the rulus for currencytransactions on the territory of Ukraine and ensures the fulfillment by the authorized banks of functions concerning the implementionof currency control.

The National Bank: effect on the progress of the banking system

The first level of Ukrainian banking system - the NBU - has been described above. The system of commercial banks - the second level of the banking system.

The central bank implemented sequential control over the formation of the statutory capitals of the banks. and the standards of solvency, liquidity, and the maximum size of credit per loan debtor were put into practice, which helped prevent the crash of many banks, also improve the quality of servicing the clients. As an important tool of influence for the NBU on the activities of commercial banks, the mechanism of mandatory reserves was used.

a) Credit-and-monetary policy and monetary reform

The National Bank of Ukraine consistently has pursued a reasonable credit and monetary policy. Using the mechanism of monetary leverage, the control over the condition of money supply in circulation was implemented. This made it possible:

• to lower the NBU discount rate;
• to secure stability of the currency;
• to implement monetary reform successfully;
• to introduce the national currency - the hryvnia.

Monetary reform in Ukraine, in a wide interpretation, pursued at least three aims:

• to create the national monetary system of the independent Ukrainian state;
• to ensure the constancy of the national money on the level which is appropriate to stimulate the economic and social development of the country;
• to ensure the functioning of the new monetary system pursuant to market-oriented economy.

 

The volume of cash in circulation not only has not increased during the period of reform, it decreased by nearly 150 mln UAH.

Due to an increased number of time deposits of business entities and the public, the liquidity of commercial banks increased by from 150 mln UAH to 500-600 mln UAH by late October 1996. This contributed to the growth of volumes of credits provided to business entities by commercial banks and long-term crediting has appeared.

The structure of money supply improved.

After the monetary reform, the NBU sharply faced a new challenge. It had to secure stability of the national currency.

Steps taken on this path are as follows:

• successful monetary policy, which has been oriented at the stabilization of the economy and has contributed disinflation;
• achievement of stabilization of the official exchange rate and a stable par between the official rate and the market rate;
• increase in the volume and improvement of the structure of official currency reserves needed to support the exchange rate of the hryvnia to foreign currencies;
• suspension of the practice of non-sanctioned issuance of payment means applied by commercial banks.
• incorporation of the new system of electronic inter-bank settlements; and

transition of the banking system to the International Accounting Standards in the beginning of 1998;

The NBU has developed a number of instruments for regulation of the monetary-credit market:

• set up the procedure for formation of mandatory reserves by commercial banks;  
• appropriate mechanisms for the issuance and withdrawal of credit funds;
• defined the rules for the fulfillment of open-market operations, such as credit auctions, collateral crediting, and transactions on the share market.

 

Since 1994, the National Bank renounced direct crediting of banks against production-related targeted programs and put credit auctions into practice. In order to support the short-term liquidity of commercial banks, the NBU instituted lombard crediting - crediting on the security of highly liquid securities.

Mechanisms for the regulation of the monetary-credit market, which the National Bank applies are :

• the discount rate on credits;
• the size of which is defined depending on the level of inflation;
• demand and supply for credits at auctions;
• inter-bank markets for the gradual decline of the discount rate.

 

b) Currency regulation

At the beginning of the NBU's activity, the currency market concentrated on lots of problems like 1)the slow pace of restructuring;2) faulty legal framework for advocacy of business people's rights;3) augmentation of processes which caused inflation and as a result increased demand for currency values.

The fixation of the exchange rate in Ukraine that lasted from August 1993 to October 1994 exacerbated the negative condition in the  economy such as 1)reduced exportation of products paid for in foreign currency 2) the volumes of outputs of import-dependent enterprises 3) decreased receipts of hard currency 4)increased outflow of capital abroad.

Since October 1994, the official exchange rate of Ukrainian Karbovanets began to be defined by way of bidding on the Ukrainian Inter-bank Currency Exchange (UICE).

Since June 1995, the currency exchange has initiated daily sales of US dollars and Russian rubles, and since December of the same year - German marks andaffiliates of the UICE were opened in Kharkiv, Dnipropetrovsk, Donetsk,Lviv and Crimea.

Since spring 1995, authorized banks have been given the right to carry out in the inter-bank currency market of Ukraine transactions of buying and selling US dollars, German marks, Russian and Byelorussian rubles, which are subject to free sale.

What is more to increase the demand for the national currency and stabilize the exchange rate: on initiative of the NBU, the Verkhovna Rada passed the Law pursuant to which remuneration of labor of residents of Ukraine on its territory must be implemented exclusively in the national monetary unit and cash foreign currency as a means of payment on the territory of Ukraine has been since August 1995.  

Since may of 1997, to Article VIII of the Statutes of the International Monetary Fund hryvnia became a convertible monetary unit in current transactions.