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Decapitalization of Ukraine's financial sector: causes and consequences

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  • A. Danylenko, V. Zymovets, N. Shelud'ko

Abstract

The article reveals the conceptual basis of decapitalization of the financial sector as a phenomenon generated by both objective and subjective factors: the fundamental causes of decapitalization of the financial sector may be deteriorating financial condition of borrowers and issuers, capital losses in other sectors resulting in negative values of net savings at macro level; in the case of reduction of the rate of net savings or its negative value (with unavailability of external financing) economic system undergoes local or total decapitalization, which expands to all sectors. The authors indicate that the forms and methods of decapitalization of the financial sector are determined by the type of financial institution, and by the special nature of financial relations with other sectors, and the related structure of assets and liabilities. Justified the concept of "decapitalization of the financial sector" as absolute reduction of the nominal amounts of equity and equity equivalent for the financial institutions of all types less the capital of the central bank; this interpretation requires a balance approach and allows evaluating the extent of decapitalization nominally, taking no account of money depreciation due to inflation. It is established that decapitalization of the financial sector in Ukraine in 2014 - first half 2015 acquired the following main forms: a decrease in equity due to depreciation of debt based financial instruments; decrease in equity due to the depreciation of equity debtfinancial instruments; reduction of capital in connection with the termination of financial institutions. The authors argue that the fundamental reason of decapitalization of the banking sector were interrelated trends of depreciation and liquidity shortage associated with the loss, by part of the banks, of their ability to fulfill obligations to depositors and creditors. It is shown that the main reasons of the decapitalization of the Private Pension Funds were the rapid reduction of pension contributions as a result of the poor financial state of the real sector companies that fund the programs of supplementary pension probision, as well as losses due to the depreciation of the stocks portfolios and banks' insolvency. It was found that the determining factors of the decapitalization of the insurance companies were the reduction of their registered authorized capital due to reducing the amount of licensed insurance companies, deteriorating financial performance (due to lower demand for insurance services caused by the overall economic downturn), depreciation of financial assets (shares) and the loss of funds in the insolvent banks, which led to increased number of loss-making insurance companies. It is shown that the main causes of the decapitalization of the Collective Investment Institutions(CII) operating on market principles were the withdrawal of capital by the participants of open-type CII, which coincided in time with the banking panic (early 2014); depreciation financial assets and loss of funds in insolvent banks; suspention of the circulation of the issuers' securities on the occupied territories (in the Crimea and in the ATO area). The authors define the quantitative (nominal) amount of the decapitalization of the financial sector in Ukraine by segments; it is found that the main negative effects of the decapitalization of the financial sector of Ukraine during 2014 - first half of 2015 are the following: lack of equity to restore confidence in financial institutions, the decline in the debt financing of the real economy, higher interest rates due to the growing shortage of free financial resources on the domestic market and the failure of the financial sector to increase theirs propositions. The authors provide an assessment of the consequences of decapitalization of the financial sector for Ukraine's economy. It is emphasized that the lack of capital in financial institutions will remain one of the main obstacles to the recovery in equity and debt financing in the real economy, which will complicate the launch of market mechanisms of economic recovery in Ukraine.

Suggested Citation

  • A. Danylenko, V. Zymovets, N. Shelud'ko, 2015. "Decapitalization of Ukraine's financial sector: causes and consequences," Economy and Forecasting, Valeriy Heyets, issue 4, pages 7-28.
  • Handle: RePEc:eip:journl:y:2015:i:4:p:7-28
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    File URL: http://eip.org.ua/docs/EP_15_4_07_uk.pdf
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