Financial SectorGroup 11

Summary of Recommendations

Why to reform the financial sector • One of the main elements of the “emergency reform package” – insolvent

banks/financial institutions add to macroeconomic destabilization and fiscal risks, trigger depositors and investors run. We must stop bleeding in the financial sector to restore macroeconomic and microeconomic stability and prevent poverty aggravation short term.

• Financial sector plays an important role in economic revitalization and enterprise modernization in the medium to longer term – investments comes via financial institutions. Thus, private and state owned financial institutions should be healthy, transparent and efficient

• Finance-constrained firms can’t sustain growth and jobs , can’t finance innovation and modernization, can’t invest into quality/productivity – this will undermine export growth and competitiveness of Ukraine, incl. export diversification into new markets and along higher value added services and products

• Healthy financial sector is a must to restore trust in the system (depositors and investors confidence) and increase domestic savings and international investments required for financing sustainable growth (SME finance, quality/technology upgrade and export finance, infrastructure)

Future – 2020? • Stable, more resilient, and less fragmented financial sector – fewer

but better banks, insurance, non-bank credit, pension, capital markets institutions

• With deeper financial penetration (assets, loans, deposits to GDP) and financial inclusion (services and products used by householders, SMEs and corporates) to support economic growth and shared prosperity

• Adherent to international standards and practices, including EU/AA, BIS, IOSCO, IAIS, IFRS, IPO, IADI, CPPS, OECD Governance, consumer protection etc, enabling higher transparency, soundness, efficiency and confidence in the financial sector by domestic and international investors and depositors

• With more diversified markets, institutions, products and skills, to better serve the needs of the knowledge and innovation led growth and support economic modernization - with products tailored to support MSMEs, exports, longer term project and infrastructure financing

Key reform objectives 1. Stabilize financial sector – stop run on banks, reduce systemic risks

and negative impact on economy (savings, payments, social services etc) to help macro stabilization

2. Resume lending to support economic growth/modernization and prevent economic contraction

3. Restore health and investor/depositor confidence to set the stage for longer term sustainable financial sector development – Clean up the financial system (capitalization, exit of insolvent banks,

return to profit) and develop sound regulatory/supervisory framework – Resume proper functioning of the banking sector in a more transparent,

efficient, competitive manner, in more compliance with international practices

– Increase developmental impact of the financial sector – reforms to improve access to finance, markets, services for growth and inclusiveness (banks, capital markets, other non-bank financial institutions and services, equity/FDI, risk capital, risks management and reduced risk of lending/investment in Ukraine etc)

Immediate priorities and quick wins

SHORT TEAM STRATEGIC ACTIONS FAST MEASURES

• Put insolvent banks into resolution and clean up the financial system

• Effectively manage bank resolution (decisions, costs , process, contagion) to minimize costs and restore trust

• Capitalize deposit insurance and build capacity

• Reform financial regulators (NBU, SEC, NBFIR – integrity, competence, independence, collaboration- lustration)

• Adopt IFRS reporting for FI • Do inventory and rationalize all state

subsidy/intervention programs for SME/sectors support

• Enhance the role of Ukreximbank (as wholesaler/guarantor) to foster export financing, guarantee and promotion programs for export development

• Adopt banking sector reform strategy• Create Financial Stability Committee• Enforce full public disclosure of

information on real owners for all financial institutions, public JSC and public interest companies

• Enforce related party lending limits • Liberalize FX controls • Enforce OECD principles for corporate

governance of FI and public interest or large corporates

• Streamline capital registration • Adopt debt/equity swap and NPL

restructuring procedures • Revise deposits early withdrawal

terms/penalty framework • Adopt legislation for risks

hedging/derivatives

Medium to Longer term reformsLower priority but quick win

Medium priority High priority

Medium Term

• Enhance consumer protection and enforceresponsible lending

• Enhance sub-national debt financing framework

• Increase convergence with EU directives in financial markets/services (along the work plans for Association Agreement)

• Foster credit bureau reform -consolidate and increase efficiency and quality in information sharing and additional products for risks management (credit scoring etc)

• Develop credit enhancement mechanisms /solutions for SME finance

• Revive assets based financing instruments (including warehouse receipts, leasing, factoring etc) to foster SME financing

• Enhance capital markets infrastructure and listing requirements

• Revise tax treatment of securities investments to encourage capital investments

• Financial markets consolidation strategy along more transparent, efficient and sound FIs

• Foster NPL resolution and streamline enterprise restructuring/ insolvency (corporate and personal) and refinancing

• Enforce consolidated supervision • Complete financial sector regulatory reform • SOE/Naftogaz debt restructuring • Review mandates , governance and

performance of state banks (lower fiscal exposure, higher efficiency and stability)

• Launch pension reform • Adopt clear strategy for state debt/securities

issues (volumes, maturities, pricing) • Reduce barriers to entry/issue and enhance

investment instruments (including covered bond) for pension funds, insurance companies, and deepen financial markets

• Enact law on derivatives and /or develop hedging instruments framework /regulations

Long term

• Increasefinancial capability of households and

• Nationalized banks exit strategy • Develop legislation for risk capital

(venture capital, angel investments)

Cross-sectoral – overarching reforms • Rule of law + judiciary • Zero tolerance to corruption and political/professional forbearance • Clear and predictable rules of the game – governance, property rights

protection, IPR, entry/exit, assets valuation and foreclosure, insolvency, disclosure by companies and FIs – in line with international practices

• Accounting and Auditing reform for firms, SOEs, and FI in line with IFRS (including simplified for SMEs in line with EU recommendations)

• Tax reform – tax burden (social taxes and indirect taxes), tax administration, tax rebate/credit

• E-government and Open Society – full access to data and improved data quality

• Administrative reform to eliminate conflict of interests, increase accountability and competences

• Public-private dialogue platforms and format for increased accountability of civil servants, incl. Parliament, Government, President, local councils

• Deregulation (except financial sector!), regulatory impact assessment framework, active public communication and predictability of the rules!

• Enhanced Competition and elimination of non-level playing field