1. Ukraine Banking – how to make it safer for years to come “We need good brakes in order to drive fast!” Marius Vismantas Country Sector Coordinator, Financial and Private Sector Development Ukraine, Belarus & Moldova The views expressed in this presentation do not constitute an official position of the World Bank Group on the issues discussed

2. Taking a look to the future Ukraine slowly following others and repeating mistakes? Or Ukraine leading and building a transparent financial market with safety and depositor & taxpayer protection measures at the fundament?

3. Taking a look to the future Bank capital adequacy to go up Ukraine presents higher risks than many other countries Failing banks – without a strong capital base/back-up Capital required from banks should be commensurate with country risk – it just cannot be at the same level as in developed financial markets Countercyclical measures (e.g., dynamic provisioning) imperative to build reserves in normal times We need good breaks in order to drive fast!

4. Higher capital Would reduce the need for borrowed reserves Would increase public confidence in banking system Would give better motivation to bank owners to manage risks Would substitute for the lack of institutional capabilities

5. Taking a look to the future Capital will be more expensive – Ukraine’s Loan/Deposit ratio at 200% is among the highest is the region – serious imbalance – Financial system lacks back-stops  Nowhere to spread the risks – no capital markets to speak of  There is nobody to buy the stock of NPLs – neither public nor private sector is not ready for such magnitudes; banks will have rely on their shareholders – Pressure on the need for external (especially short-term) borrowing and fight for deposits has to go down

6. Taking a look to the future Strength of the regulator is a significant factor in the cost of finance All banks are SMALL ENOUGH TO FAIL – good framework of dealing with failures is key – R EGULATOR RESPECTED AND UNCOMPROMIZING

7. Taking a look to the future C HEAP ENERGY RESOURCES LEAD TO CLIMATE WARMING C HEAP UNHEALTHY FOODS LEAD TO HEALTH ISSUES C HEAP, EASILY ACCESSIBLE FINANCE LEADS TO DEBT HANGOVERS C OST OF LOW - COST FINANCE – WITHOUT FUNDAMENTALS FIRMLY IN PLACE - IS TOO HIGH !

8. Taking a look to the future By 2015 and beyond - Consolidated, Stable, Competitive, Transparent, Well Managed, Client-Focused – Consolidated fewer yet stronger banks – Stable capital base stronger than in comparable EU/OECD countries, reflecting higher risks of doing business in Ukraine smoothed development with no up/down excesses – Competitive share of top 3/5/10 banks below international averages level playing field for all banks operating in the country entry barriers high, exit barriers low rules of the game tough and enforced All banks small enough to fail.

9. Taking a look to the future By 2015 and beyond - Consolidated, Stable, Competitive, Transparent, Well- Managed, Client-Focused – Transparent ultimate controllers known to all supervision consolidated IFRS in place and fully functional – Well-Managed fit and proper managers and especially controllers/supervisory board members independent membership in bank boards strongly encouraged regulator respected, fair in level treatment, yet ruthless in enforcement of rules Self-governing banking community – deeply caring about the fundamental ethics and reputation of the profession – Client-Focused consumer protection rules to reduce information asymmetry banking ombudsman operational and respected