Developing Sound Banks in Transitional Economies: Structural Reforms in Ukraine

This paper explores the methods that the Ukrainian government (supported by international technical assistance providers) is developing to minimize the probability of a damaging, systemic banking crisis. The contention is that with highly lucrative existing sources of income for banks receding (and profits under increasing pressure), banks will more aggressively expand their balance sheets - but not necessarily in a healthy manner - as well as engage more in riskier off-balance sheet activities, such as foreign exchange trading. Thus, in the coming period, the fragility of the Ukrainian banking system could increase, leaving the system at greater risk. The first two sections briefly review banking under the Communist system, and in the first period of the transitional governments. Then follows an in-depth discussion of Ukraine which explores at some length some of the elements needed for a more comprehensive strategy. An appendix deals with the question of banking sector strategy in more general terms.