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Archive 2005

  • 23.11.2005

    Market structure, minimum capital requirements and the stability of the banking sector in Ukraine

    (Code:U14)

    Ukraine's banking sector consists of around 160 commercial banks, most of them being rather small. According to a widespread view, this market structure is not a healthy one, as it implies high risks for the stability of the banking sector. Supporters of this view favor a consolidation in the banking sector by means of raising minimum capital requirements. In line with this way of thinking, the National Bank of Ukraine (NBU) decided in 2001 to raise minimum capital requirements from EUR 5 m to EUR 8 m in several steps over the period 2003 to 2007. Currently, an increase up to EUR 10 m is under discussion.
    In our view, this widespread view is not convincing. Raising minimum capital requirements makes banks bigger, but not necessarily safer; size is not a good indicator of solvency. Furthermore, higher minimum capital requirements increase the barriers to entry and limit competition in the banking sector. Besides, and more fundamental, it is not the job of the banking supervision to judge on the desirability of the existing market structure. The market structure has to be decided by market forces, not by regulators or politicians.

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