The\nrule of law is a general concept covering independence of the judiciary,\ncorruption prevention, non-jobbery, effective law enforcement, and absence of\nstate capture. It influences numerous aspects of public and economic\nlife. CES have studied a specific example of such influence\nin their \u2018Banking Fragility Rooted in Justice Failures\u2019 (10 May 2019) memo developed\nfor the Centre for European Policy Studies under \u2018European Freedom and\nSecurity\u2019 activity. Its translation is published here. <\/p>\n\n\n\n
Banking sector health is a key component of the country macroeconomic stability. A robust banking system contributes to the productivity and country economy growth by granting loans for investment projects but there is no such thing in Ukraine. The corporate loans are scarce due to high credit risk, and its main components given below are in their turn related to the weak rule of law: <\/p>\n\n\n\n
– The massive-scale bad debt problem, still unresolved\nby the banks<\/p>\n\n\n\n
– High probability of borrower default materialised\nduring the bank crisis<\/p>\n\n\n\n
–\nAbysmal level of lenders\u2019 funds recovery after the borrower bankruptcy and\nforeclosure. <\/p>\n\n\n\n
The\nmemo describes the rule of law impact pathways with regards to the above credit\nrisk components. It is based on in-depth interviews with experts,\nformer and acting public officials, bankers and analysts carried out in autumn\n2018. <\/p>\n\n\n\n
The\nfact that every other Ukrainian bank collapsed under a mountain of\nnon-performing loans is down not only to the war and crisis but rather to\nrampant fraud and raging kindred lending at \u2018vac banks\u2019 before the crisis,\nignored or unchecked by the regulator. <\/p>\n\n\n\n
There were three types of supervision:\nthe first is you describe everything as it is and then our boss makes you\nrewrite everything; second is you go for the on-site audit already informed of\nwhat you will have to write; and the third is you just describe everything as\nit is. (From an interview)<\/em> <\/em><\/p>\n\n\n\n The\nloan default probability is linked to both common problems caused by inadequate\nproperty rights and contract performance protection in the jurisdiction and to\nspecific problems, e.g. loans due to an \u2018indispensable advice\u2019 that may undergo\ninsufficient risk analysis. In total, these factors result in non-performing loans\nshare in state-owned banks twice as high as in privately owned banks. <\/p>\n\n\n\n A number of Members of Parliament enjoy\nan impact on financial\u2013industrial groups and vice versa.<\/em> <\/em>They wish to reiterate their impact [on state-owned\nbanks].<\/em> <\/em>That is why some of them are against independent supervisory board\nmembers [in state-owned banks]. (From an interview)<\/em> <\/em><\/p>\n\n\n\n Ukraine\nshows one of the lowest recovery rates in the world for bankruptcy or\nforeclosure cases. In other words, if a borrower defaults the lenders are\nlosing almost everything whereas in other countries they may get 60% to 90% of\nthe loan face value. <\/p>\n\n\n\n The major bottleneck for effective resolution [is] definitely the\ncourts.<\/em> <\/em>The banks simply could not get their collateral because the procedure is\ncaptured by vested interests in so many stages.<\/em> <\/em>Corporate borrowers widely use the loopholes and corruption. (Expert at\nthe Ukrainian banking association)<\/em> <\/em><\/p>\n\n\n\n To\nmeet the bad loan challenge, make the banking system more resilient, and drive\nsustainable growth, Ukraine has to focus the rule of law reform, in particular,\non the radical improvement of its financial sector. This\ncan be achieved by joint effort of the financial sector, law enforcement\nagencies, and judicial system reform teams. <\/p>\n\n\n\n The possible options to support\nimprovement are establishing a special bureau for financial crime\ninvestigations, creating a database for judicial practice in financial fraud\ncases, streamlining insolvency procedures, empowering the independent\nregulator, and supporting reform of the state-owned banks. <\/p>\n","protected":false},"excerpt":{"rendered":" The rule of law is a general concept covering independence of the judiciary, corruption prevention, non-jobbery, effective law enforcement, and absence of state capture. It influences numerous aspects of public and economic life. CES have studied a specific example of such influence in their \u2018Banking Fragility Rooted in Justice Failures\u2019 (10 May 2019) memo developed […]<\/p>\n","protected":false},"author":1,"featured_media":11695,"comment_status":"closed","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[176,186,197],"tags":[552],"experts":[172],"news_type":[140],"class_list":["post-8426","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-macroeconomics-en","category-reports-en","category-research-list-en","tag-rule-of-law-en","experts-maria-repko","news_type-researches"],"acf":[],"_links":{"self":[{"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/posts\/8426","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/comments?post=8426"}],"version-history":[{"count":0,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/posts\/8426\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/media\/11695"}],"wp:attachment":[{"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/media?parent=8426"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/categories?post=8426"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/tags?post=8426"},{"taxonomy":"experts","embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/experts?post=8426"},{"taxonomy":"news_type","embeddable":true,"href":"https:\/\/ces.org.ua\/en\/wp-json\/wp\/v2\/news_type?post=8426"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}