Archive 2005

• 01.12.2005

  Credit expansion, capital adequacy ratios and the stability of the banking sector in Ukraine

  (Code:U15)

  In recent years, bank loans expanded rapidly in Ukraine. Regulatory capital of banks has also increased, but at a much lower pace. As a result, the capital adequacy ratio (CAR) for the aggregated banking sector dropped significantly and stood at 14.8% as of September 2005. The National Bank of Ukraine (NBU) does not publish information regarding CARs for different groups of banks. But there are good grounds to believe that CAR for the group of the ten largest banks in Ukraine is considerably lower than 14.8% and might stand below 12%, which is not far away from the minimum of 10% set by the NBU.
  Should this estimation be correct, then we should consider this situation as rather dangerous. Likely events such as a drop in real estate prices, an economic recession or political instability in the context of parliamentary elections in March 2006 would further lower the CARs. As a result, the ratios for the group of large banks could get near or even below 10%, thus jeopardizing the stability of the banking sector. The problem will most certainly not be solved by banks themselves; most large banks are for sale and bank owners have no incentives to inject new capital or to restrain lending. Consequently, it is for the NBU to take action and prevent a further deterioration of CARs.

  Attached file  (33.3 kb)
  Authors:  Джуччі Рікардо
  Tags:  Center of economic research, German advisory group