Ukraine: Struggling banking sector and substantial political and economic uncertainty

Abstract

The situation of banks in Ukraine is exceptionally challenging for a number of reasons: They have not managed to recover from the 2008–2009 crisis before being hit again in 2014. The deep Ukrainian recession and the plunge of the hryvnia together with strong exposure to geopolitical tensions tipped the banking sector again deeply into the red and created an environment of persistent uncertainty. Many foreign-owned banks have left the country. In addition to chronic structural shortcomings like weak rule of law and protection of creditor rights or excessively high corruption and opaque ownership structures;the most significant problems that are currently plaguing the sector include high and growing credit risk and high exchange rate risk. The country is subject to a dramatic credit crunch and to even larger deposit outflows. Financial intermediation has practically collapsed. The number of insolvent banks is quickly rising. The major shock-absorbing factor is the IMF’s and the international community’s ongoing commitment to financially assist Ukraine.