This monograph is devoted to analyzing and assessing the transformation of banking regulation and supervision in Ukraine against the background of the EU-Ukraine Association Treaty of 2014. Since the gradual move of the Ukrainian banking environment towards EU standards is full of challenges, the monograph explains not only the principles, functions, tasks and specifics of the existing system of banking regulation but also to assess the implications of the reform process of the bank regulatory environment in Ukraine.
The dominance of government regulation and the rarely existing niches of self-regulation are structural features of Ukrainian banking regulation that have to be taken into consideration during the ongoing reform process because they also reflect the “culture” of banking regulation in Ukraine which may differ from many other jurisdictions in this respect. Along these lines, the developments of the Ukrainian banking system not only differ somewhat from Western standards but also show some distinct features compared to some other post-Soviet countries. Consequently, the ongoing transformation of the Ukrainian regulatory environment towards EU standards has some specific aspects, which particularly will be pointed out.
In order to gain a better understanding of these aspects, one has to reflect on both the geographical location of Ukraine and its originally insignificant coverage of banking services for the population. One also has to account for the rapid and partially uncontrolled inflow of – in particular – European capital into the Ukrainian banking sector of Ukraine from 2005 until the Global Financial Crisis (GFC). A prime example of this period was the acquisition of Bank “Aval” by the Austrian Raiffeisen Bank International.
This transaction demonstrated the far-reaching effects of the application of European requirements on Ukrainian bank organizations, especially regarding the internal management of banking processes. However, this modernization period of the Ukrainian banking industry almost came to a standstill due to the GFC, leading to significant capital outflows beginning in 2009. Although the momentum of modernization due to European ownership of Ukrainian banks is now gone, the relative share of foreign capital in the Ukrainian banking system roughly remained the same due to increased investments from the Russian Federation. Thus, recent Russian investments have also contributed to the reshaping of the banking system in Ukraine.
Another aspect of consideration is the current fragile environment in Ukraine, which is closely linked to the military conflict in the Eastern part of the country and the annexation of Crimea by Russia. The pending tensions between Ukraine and Russia in this context have triggered the imposition of harsh conditions on Russian capital in the Ukrainian banking sector with the policy objective to strengthen the role of Ukrainian state banks.
When addressing particularities of the Ukrainian banking system, it is also important to refer to the dependence of the Ukraine on the National Bank of Ukraine due to the current political situation in the country. Thus, this dependence has significant practical implications on the treatment of certain systemically important financial institutions owned by oligarchs. These individuals, who are supportive of certain political interests, may try to influence the National Bank for the sake of their business operations.
Against this background, the current Ukrainian efforts to adapt its system of banking regulation and financial supervision to EU standards is causing a significant transformation of the domestic banking system. Thus, this monograph intends to provide a thorough understanding of the mechanisms of the Ukrainian banking system, its stages of development, its transition towards EU standards and its future prospects towards a strengthened European integration process.