Ukraine: struggling banking sector amid substantial uncertainty

The situation of banks in Ukraine is exceptionally challenging for a number of reasons. First of all, banks had not managed to recover from the 2008–09 crisis before being hit again in 2014. Hence, the deep Ukrainian recession and the hryvnia’s plunge – together with strong exposure to geopolitical tensions – tipped the banking sector again deeply into the red. Amid an environment of persistent uncertainty, many foreign-owned banks have left the country. In addition to chronic structural shortcomings, such as weak rule of law, excessively high corruption, opaque ownership structures and connected lending, the most significant problems currently plaguing the sector include high and growing credit risk and high exchange rate risk. The country faces a dramatic credit crunch and even more alarming deposit outflows. Financial intermediation has practically collapsed, with the number of insolvent banks rising quickly. The major shock-absorbing factor is the IMF’s and the international community’s commitment to financially assist Ukraine.