Tax increase on bank profits up to 50% has become a dangerous challenge that threatens to shake the already fragile foundation of the domestic financial system. Despite the warnings of the IMF and the National Bank, this decision can start a chain reaction that will deprive businesses and citizens of affordable loans, slow down economic development and undermine trust in banks, which is still preserved only on the ruins of the painful lessons of the past.
In a country where the memory of depleted savings and broken promises still hangs over people, the move seems a risk that could revive the specter of financial disasters of decades past. Last time we remembered two such episodes are the Pavlov monetary reform and the collapse of the USSR Savings Bank. Currently, we offer you to refresh your memories of the bankruptcy of the Bank “Ukraine”, the hype around financial pyramids and the infamous bank failure of 2014-2016.
What led to the bankruptcy of Bank “Ukraine”
In the early 2000s, the largest agro-industrial bank “Ukraine” went bankrupt. The reason was the crisis of 1998 and the default in Russia, which at that time had close economic ties with Ukraine. Attempts to support the bank with state funds were unsuccessful, and in 2001 the bank ceased to exist.
The bankruptcy of a powerful financial institution shocked the country. Gullible depositors were left without savings, which became a financial disaster for many. Among the victims were representatives of small and medium-sized businesses that depended on banking services.
The loss of money undermined confidence in the entire banking system. Many people stopped using banks, which made it difficult for banks to access resources and limited their ability to support the economy. Social outrage grew, and criticism of the government became louder.
The bankruptcy of Bank “Ukraine” was the result of weak control and intervention of politicians. According to experts, under certain conditions this disaster could have been prevented. First of all, strict supervision of the bank was needed in order to notice problems in time, first of all, unreturned loans or fraud. It was also necessary to make management transparent so that it became impossible to hide financial problems. It was also important to limit the influence of politicians who used the bank in their own interests, financing unprofitable projects.
The bank should have issued loans more carefully, checking the creditworthiness of borrowers. In addition, an early warning system was needed to quickly take action if the bank faced difficulties.
In general, a stable economy and a fight against inflation would also help reduce the pressure on the banking system. And deposit insurance would protect people from losing money in the event of bankruptcy. It was important to hold the bank’s management accountable for mistakes or abuses.
Financial pyramids of the 1990s
Widely known in the 1990s, the meme performed by the people’s favorite simple-minded Leoni Golubkov “I’ll buy my wife boots” instantly brings to mind the advertisement of “MMM” – one of the largest Russian financial pyramids, founded by Serhii Mavrodi. Commercials featuring the fictional character Lena Golubkova became a symbol of the times. They convinced naive ordinary people that it is possible to earn easily and quickly by investing in a similar way.
In the 1990s, Ukraine experienced difficult times due to the economic crisis, inflation and uncertainty. Against this background, financial pyramids grew like mushrooms after the rain. People tried to save or increase their savings by investing in “MMM” and “Ometa-Inster”, which promised super profits in a short time. Advertisements and stories about those who allegedly got rich encouraged people to invest their last funds.
But these pyramids had no real earning mechanisms. The profits of the first depositors were paid at the expense of new participants. When the flow of new money dried up, the pyramids collapsed, leaving people with no savings.
For hundreds of thousands of Ukrainians, the collapse of these schemes was a catastrophe. The circles on the water became wider: people lost trust not only in dubious devices like “MMM”, but also in the banking system in general, and began to keep money “under the pillow”. This became a “red flag” for the authorities. Stricter regulation of the financial sector was introduced, control was strengthened and financial literacy of the population was increased. But for many, these reforms came too late.
It seems that today our compatriots are much more experienced and, having encountered something similar, are unlikely to peck at such a bait.
“Bankopad” in 2014-2016
In 2014-2016, almost a hundred banks were closed in Ukraine. A chain of events led to this. As a result of the economic crisis caused by the annexation of Crimea and the conflict in Donbas, where the assets of many enterprises and financial institutions were located, business suffered significant losses. After that, the IMF started a program of financial assistance to Ukraine, demanding to assess the stability of the banking system through stress tests. The results of the inspections led to the closure of some banks.
The National Bank stated that some banks violated the rules of financial monitoring or engaged in dubious operations, primarily serving the business interests of their owners. Because of this, many unreturned loans and “empty” assets accumulated, which led to bankruptcy during the crisis period. Some banks only existed because of “financial bubbles” that eventually burst.
Other banks had to increase capital, which not all succeeded. Many financial institutions fell under temporary administration, although there were alternatives to this – activity restrictions or mergers. Those that did not meet the new standards were closed, leading to mass bankruptcy.
The National Bank explained these actions by the need to prevent a serious financial crisis. Vasyl Furman, representative of the NBU Council claimed, that although these measures were painful, they prevented the collapse of the banking system. He acknowledged that not all decisions were perfect, and some shareholders of failed banks are still challenging them in court. However, he is sure that most of the liquidated banks posed a real threat to the stability of the financial system and the economy in general.
Therefore, the National Bank carried out a large-scale “reboot” of the system to create a more transparent financial sector. The “bank failure” caused by this intervention became a tragedy for many of our compatriots who lost their savings. The Deposit Guarantee Fund partially offset the losses, but those whose deposits exceeded the limit remained unhappy. Businesses that kept funds in insolvent banks went bankrupt.
“Bankopad” caused a crisis of confidence in the banking system. People began to avoid deposits and keep money at home, which limited banks’ liquidity, reduced lending and slowed the economic recovery. This, in turn, caused a new wave of social tension.
But the crisis also had a positive impact, because it catalyzed important reforms. The NBU introduced new standards of transparency, strengthened control and increased the requirements for capitalization of banks. Although the reforms were painful, they laid the foundation for a stable banking system.
The crisis of the banking system of 2014-2016 could have been less destructive if the necessary measures had been introduced earlier. The National Bank was supposed to regularly check banks, their reporting and activities in order to detect problems in the early stages. It was important to limit lending to related companies in order to reduce financial risks and improve the stability of the banking system.
It was also necessary to pay attention to currency risks. Many banks had large debts in foreign currency, but received profits in hryvnias. When the hryvnia was sharply devalued, it was a blow to their solvency. Strict rules for currency risk management could help balance banks’ assets and liabilities.
It was equally important to create economic stability. During the war and the annexation of Crimea, the economy plunged into chaos, which further deepened the problems of the banks. Timely actions to support macroeconomic stability, inflation and exchange rate control could reduce the pressure on the financial system.
Gradual reform of the banking system before the crisis could also make a difference. Weak and unreliable banks had to be removed from the market in advance, when the economic situation was more stable. This would help to avoid a massive “bankruptcy” at the worst moment.
In order to protect depositors, it was necessary to increase the limits of compensation by the Deposit Guarantee Fund. This would give people more confidence that their money is protected even if the bank fails. Along with this, it was important to increase the financial literacy of the population, explaining the risks and rules of the financial system. This would help citizens understand how to choose reliable banks and avoid rash decisions.
Also, banks needed to increase capital in advance and create reserves for crisis situations. This would increase their financial “cushion” in the event of an economic shock.
…These events did not just cause devastating financial losses to Ukrainians — they shattered confidence in the banking system, leaving deep wounds in the nation’s collective memory. They became a cruel reminder of the price of irresponsibility and neglect of transparency, proving that without strict control and financial literacy, the future of any economy can be on the verge of collapse.
Tetyana Viktorova
