Last week was marked by two events that are likely to have a negative impact on the banking system. The first concerns the adoption of the Law on Restructuring of Foreign Currency Consumer Loans. From the first glance, this event seemed to be highly welcomed, as it would lead to easing of debt pressure for many households. However, this is only one side of the coin. Indeed, first, in the banking sector this situation may mean the formation of imbalances that will need to be normalised. Secondly, and more importantly, there is reason to believe that the decision to restructure was actually made not for economic but for political and populist reasons.

On one hand, it is not the citizens’ fault that the hryvnia value of the borrowed resources has increased significantly due to the devaluation of the national currency. On the other hand, there have already been numerous discussions and warnings regarding the risks associated with foreign currency loans. However, borrowers deliberately took high risks, ignoring the general "simple" rule: to take foreign currency loans only when there is a stable source of foreign exchange earnings in subsequent periods. The violation of this simple rule also includes the responsibility for one's own conscious risky activities.

As for the banking system, the restructuring at a reduced rate means the violation of bank balance sheets, the need for new provisions, the search for sources of loss coverage, etc. Generally, foreign currency loans account for about 15% of total loans to households (about UAH 210 billion). Even if it might seem as a relatively small amount, banks will nevertheless compensate for their forced losses by making new loans, whose terms will be much stricter. Moreover, this restructuring does not mean that the debt will be paid in full (and that new "restructuring" will not be required again).

Unfortunately, this "recklessness" in risks in Ukraine is not something unusual. Moreover, it seems that a conscious violation of the rules is becoming almost a new "normality". One can simply mention the cars with "European license numbers" without proper registration and appropriate payments, whilst, at the same time, law-abiding citizens have to bear the fiscal burden. Therefore, together with openly risky actions, there is a tendency to create expectations of further "forgiveness" for not receiving the desired "benefits". Moreover, such expectations will multiply as the elections approach, by pushing the government to new populist financial easings.

The second event, which is adjacent to the first one, was the court decision of the District Administrative Court of Kyiv to cancel the reprimand to two senior NBU officials, which was previously given to them by the NBU Council (Rada NBU). This actually calls into question the legitimacy and ability of the NBU Council to properly assess the activities of the NBU Board (although this is part of the functional powers of the Council). Such decisions obviously do not increase confidence in the banking system.

While talking a lot about the independence and streamlining of activities of the banking system, other institutions often make decisions that openly complicate such streamlining. Moreover, they make it almost impossible to correct mistakes and troubles that have already accumulated.

In particular, the withdrawal from the market (under the pretext of "cleansing", not always financially justified) of more than a third of existing institutions severely damaged the banking system. However, up to now, there was no proper assessment of the situation in the banking sector in terms of both unjustified (politicised) bankruptcies of some banks and excessive enrichment of others during 2014-2017. At the same time, the aim should be to restore the business reputation of the owners and top managers of those banks that were unjustifiably removed from the banking system. It seems that this kind of "self-cleaning" would be really rational and useful for the national institutional, economic and financial environment, and it would significantly reduce the possibility of external intervention.