THE INFLUENCE OF FOREIGN CAPITAL TO THE BANKING SYSTEM OF UKRAINE

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1 Studia i Materiały. Miscellanea Oeconomicae Rok 16, Nr 2/2012 Wydział Zarządzania i Administracji Uniwersytetu Jana Kochanowskiego w Kielcach Z a r z ą d z a n i e i f i n a n s e Vasyl Yeleyko, Tetyana Futalo 1 THE INFLUENCE OF FOREIGN CAPITAL TO THE BANKING SYSTEM OF UKRAINE Considering the impact of foreign capital into the ukrainian banking system and the economy of Ukraine the clear answer about the benefits or harm of participation of foreign participants in the conduct banking business in Ukraine can not be given. In view of the global trend of financial globalization it is almost impossible to avoid penetration of foreign investments into the country, the exception is the application of strict government restrictions. Today most academics believe that the presence of foreign capital in the banking system of Ukraine is good. It is worth taking into account such positive aspects as: the development of the domestic banking system, the introduction of new technology in banking, the level of capitalization of the banking system and ensure its financial stability through foreign banks. However, the presence of foreign banks in the banking system of Ukraine would still involves a degree of dependence on other countries, the parent companies of foreign banks, which creates additional threats to the sustainable development of the national banking system. The study of theoretical and practical issues of influence of foreign capital to the banking sector of Ukraine were engaged by foreign and native researchers, such as: J. Marshall, R. Peterson, R. Rynutro, R. Levin, V. Geets, A. Shapovalov, A. Dzyublyuk, F. Shpyg, A. Yepifanov, A. Moroz, R. Nabok, N. Sheludko, O. Baranowski et al. Although a large number of works in the direction of studying the influence of foreign capital into the domestic banking sector, a number of issues related to the study of threats the presence of foreign banks in Ukraine and risks of their activity is not illuminated and in need of additional research. 1 Prof. Vasyl Yeleyko, professor, Jan Kochanowski University in Kielce; prof. Tetyana Futalo, Lviv Academy of Commerce. 257

2 The aim of the article is to study the influence of foreign capital into the domestic banking system and the identification of possible threats to the presence of foreign banks in Ukraine. At present, foreign capital occupies an important place in Ukraine's banking system, as evidenced, in particular, a considerable share of foreign banks in the domestic market loans and deposits. In recent years, the share of foreign capital in the banking system of Ukraine has increased, and there are prospects for increasing the level of 50%. By , the share of foreign capital in the authorized capital of banks in Ukraine amounted to 41.8% (Pic. 1) ,6 19, , ,7 35, ,6 41,9 41, Number of banks that have licenses for banking operations Banks with foreign capital Pic. 1. Number of foreign banks in the banking sector of Ukraine and the share of foreign capital in the authorized capital of banks from to [1] Considering quite large share of foreign capital in the domestic banking system, the urgency is the study of the influence of foreign banks in Ukraine's economy and its banking system. In this aspect, Ukraine belongs to the group of countries in which the share of foreign bank capital ranges from 15 to 80%. But we can t definitely say about the complete dependence of the banking system of Ukraine from foreign countries - dependence can be defined as relatively high. In due to the favorable situation in Ukraine and the necessity of fulfillment of conditions for accession to the World Trade Organization (WTO), foreign banks were able to increase their presence in the domestic banking sector. At that time, most scientists believed active expansion of foreign banks a good thing for a number of these reasons related to the need of: 258

3 optimization of the structure of the banking system of Ukraine and of the creation of such a model that would correspond economically developed countries, particularly the European countries; expansion of the range of banking services and improve their quality; raising additional resources through foreign banks to finance the economy of Ukraine; widening people's access to credits due to lower interest rates on loans by foreign banks; integration into the world economy and reduce dependence banking system of internal risks; opening the access for opening branches of foreign banks in the domestic banking sector to satisfy the conditions of WTO; increasing international financial ratings of Ukraine to attract foreign investment not only in banking, but also in other economic sectors [2]. Nowadays it can be argued that foreign banks have made some contribution to the development of the domestic banking system and the economy of Ukraine in general. Despite the latest technology and expertise in banking that are used by foreign banks in Ukraine, other positive expectations for the coming of foreign banking capital that occurred in the mid-2000s, at the moment is not true. Therefore now excessive presence of foreign capital in the banking system of Ukraine is regarded as undesirable phenomenon that brings with it a certain risks for the Ukrainian financial market and economy of Ukraine in general. So forming the list of main threats posed by the presence of foreign capital in the domestic banking system is necessary. These threats can include: threat of economic independence - Ukraine's sovereignty. Ownership of banks in Ukraine allow foreign participants to make a significant impact on the economy of Ukraine, which can be displayed in sharp fluctuations in rate, increasing the cost of credit and other services to the suspension of some banking services and so on. The most unwanted consequences of this threat is the possible pressure on the power, financial and administrative structure of the foreign part; objectives of foreign banks may not always match with national development objectives of the country's economy and its social sphere. For Ukraine, this threat is significant, since the entry of foreign banks in the early stages of expansion of foreign capital into the banking system was motivated by the special strategy of - quickly obtain large profits by offering new types of banking services; realization by foreign banks speculative and incomplete range of banking services. As an example, the situation in the banking sector of Ukraine in the second half of the 1990s. At this time, the primary motivation of foreign banks were investing in domestic bonds (T-bills) with a further reduction in rates and the corresponding decrease in arbitrage profits. 259

4 aggravation interbank competition allows foreign banks find themselves in a better position than local Ukrainian banks. These banks, in turn, may have problems with lower levels of profitability and maintain their market share, which would put them at risk of bankruptcy and as a result would threaten the financial stability of the banking system of Ukraine in general; threat to the economic security of Ukraine in connection with possible uncontrolled outflow of foreign capital and financial resources. Foreign banks derive abroad a part of income received in Ukraine; selective customer service and providing banking services only for industries with high profits and low risks. Activities of foreign banks in Ukraine is directed more towards the service of the consumer credit market and the provision of banking services to large corporate clients. Such strategically important to the ukrainian economy industries as engineering, metallurgy and chemical industry are not considered by foreign banks as a priority due to poor creditworthiness and need a considerable amount of credit; increasing dollarization of the Ukrainian economy and the threat of lowering the stability of the national currency. To overcome this threat in Ukraine currently the issuance of foreign currency loans is prohibited, which to this point have been for foreign banks main focus of resource allocation and revenue; a sudden outflow of foreign capital in case of change of economic situation in Ukraine or in the country based mother structures of foreign banks. In case of worsening of the economic situation in Ukraine, foreign banks can reorient their activities and reduce the amount of credit or limit the number of clients; complications of banking supervision for foreign banks. To avoid this threat an appropriate legislative support must be created and the necessary powers in this area must be given to supervisory authorities; worsening of social tensions in the country. When buying Ukrainian banks foreign owners conduct restructuring of institutions, which may be the result of mass dismissals and accordingly increase unemployment and social dissatisfaction in the population. At the same time, unable to compete with foreign banks, local banks may be on the verge of bankruptcy, which is also the cause of growing social tensions. One of the threats to the banking system of Ukraine after consent to perform a number of requirements for WTO membership was considered a threat of mass foreign branches in Ukraine. However, as recent experience shows, the opening of branches of foreign banks does not have the mass and, as expected, created threats. But this does not mean that opening foreign branches is prohibited. The procedure of opening the branch is long and requires the execution of a large list of requirements and obtain permits from the National Bank of Ukraine (NBU). Instead, another form entry of foreign capital in the banking system of Ukraine was spread. Buying local Ukrainian banks through the conclusion of mergers and acquisitions 260

5 of banks, which was very profitable for foreign participants who received already "ready to go" corporate banking branch network structure and a certain place in the market. Major threats to the presence of foreign banks in Ukraine are showed in Pic. 2. Pic 2. Major threats to the presence of foreign banks in Ukraine The list of threats to the presence of foreign banks in Ukraine is quite large and has a number of threats to the Ukrainian economy and economic security in particular. Considered threats to the presence of foreign banks in Ukraine at the present stage of its development is quite significant and can create a number of problems for the national economy and the banking system in particular. However, taking into account negative side of foreign banking capital in Ukraine at present time, it should be note that the sharp decrease in the share of foreign capital in the banking system and exit of foreign banks from the Ukrainian banking market can expect the emergence of new threats associated with the redistribution of the contribution of foreign companies to the banking sector of Ukraine and the reorientation of other banks in the system. The most appropriate is to develop a mechanism for regulating and monitoring the activities of foreign banks in Ukraine with relevant legislative field, in which the share of foreign capital in the banking system will grow and will be optimal for Ukraine in case of problematic situations in foreign banks, their negative effects will be minimal and not be experienced in the banking sector of Ukraine and its economy. Literature 1. Official Web site of the National Bank of Ukraine [electronic resource] / / Access mode: 261

6 2. Geets. V. Foreign capital in the banking system of Ukraine [electronic resource] / V. Geets / / Dzerkalo tyzhnia July (605). - Mode of access: 3. Yepifanov A. Banks with foreign capital as a possible threat to the national economy [Text] / A. Yepifanov, FI Shpyg / / International Banking Competition: Theory and Practice: book of abstracts and the International Scientific Conference (25-26 May 2006) / SHEE "UABS Bank." - Amounts., P Halitseyska Y. Impact of global economic globalization on the presence of foreign capital in the banking system of Ukraine [Text] / Y. Halitseyska / / Actual problems of the region's economy - Ivano-Frankivsk. Scientific publication. - Issue IV. - Volume P Ivasiv I. Effect of foreign banks in the banking system of Ukraine [Text] / I. Ivasiv, R. Kornylyuk / / Bulletin of the National Bank of Ukraine Oct. - P Kubakh T. Advantages and disadvantages of foreign capital in the banking sector of Ukraine [Text] / T. Kubakh / / Culture of Black Sea P Purij G. Consequences of entry of foreign capital in the banking financial market of Ukraine [electronic resource] / G. Purij / / Scientific Club «Sophus» Mode of access: Abstract Wpływ kapitału zagranicznego na system bankowy Ukrainy Tematem artykułu jest oddziaływanie kapitału zagranicznego na system bankowy Ukrainy, a także określenie głównych zagrożeń płynących z obecności zagranicznych banków na Ukrainie. The influence of foreign capital to the banking system of Ukraine The article deals with the impact of foreign capital to the banking system of Ukraine, the main threats to the presence of foreign banks in Ukraine are formed. Prof. Vasyl Yeleyko, Jan Kochanowski University in Kielce; prof. Tetyana Futalo, Lviv Academy of Commerce. 262