Working Toward Banking Transparency In Ukraine

by Paul Richardson

An extensive study has revealed how little information Ukraine’s largest banks are willing to share about their finances and their management.

Ukrainian banks are “troeshniki” (C students) in information disclosure: They disclose only 48 percent of the information they should be revealing by international standards, according to the extensive research done by Standard & Poor’s and Ukraine’s Financial Initiatives Agency, with support from USAID’s Capital Markets Project.

Such a level of transparency is insufficient for investors, both foreign and domestic, who, particularly in times of crisis, tend to look closely at where they put their money. It is also insufficient for the general public. After all, Ukrainians are themselves already investors in the financial sector, and their deposits allow banks to function, invest, and lend. These ordinary Ukrainians’ deposits are the lifeblood of any bank – as the recent bank crisis in Ukraine shows.

Timely and accurate information disclosure is critical. It is the foundation that stable banks and corporations are built upon. Without proper disclosure about their business, finances, and management, banks cannot become the pivotal financial institutions the market (and the people) need. Why?

First, disclosure standards are like x-ray goggles, giving an almost unobstructed view of the inner workings of a bank.

Second, adequate information disclosure acts as an early warning system when something is wrong with a financial institution. Disclosure requirements concerning financial statements force companies to publish data that tell market experts about possible dangers, like overexposure to foreign debt or nonperforming loans. An ordinary bank deposit holder would also get advance notice of possible problems. Banks, knowing this, would possibly adapt their strategy to make it less risky.

Disclosure rules about management and its structure force companies to reveal who the people running the company are: what is their education, their previous work experience, and their business and personal reputation? In well-regulated markets, the motto is: “Disclosure is the best disinfectant, and sunshine is the best policeman.”

Information disclosure rules also act as a deterrent to affiliated party transactions and other abuses: the chances are greater that a manager will resist temptation to use the bank as a cookie jar if he knows its finances are transparent. And so are the chances that he will abstain from hiring his first cousin out of family loyalty.

But for now, information disclosure by Ukrainian banks is insufficient to satisfy these needs.

That said, many market participants and government representatives understand that increasing transparency is crucial. That’s why the Joint Stock Company Law was finally passed last year. Among many other good features, it sets higher transparency standards for these companies.

Another positive step is the Electronic System of Comprehensive Information Disclosure (ESCRIN). It is being implemented by the Securities and Stock Market State Commission (SSMSC) with support from USAID’s Capital Markets Project, as part of USAID’s 15 years of commitment to develop Ukraine’s financial sector.

As soon as the implementation process is over early next year, it will become mandatory for all publicly listed and traded companies to disclose information according to the ESCRIN requirements, bringing Ukraine one step closer to international standards and to building investor confidence in the capital market.

Once ESCRIN is in place, any investor can access the ESCRIN data through the SSMSC website, type in the name of any publicly listed and traded company, and find an unprecedented amount of quality information about the issuer. This information will be in real-time to allow investors to make timely decisions. It will also be free of charge, to allow wide public exposure.

ESCRIN will include descriptive parts, understandable to people who do not have a higher financial education, to people who have bank accounts, mortgages, investments in pension funds — and, therefore, have the right to know. As these disclosure obligations are being put in place, they have to be enforced in a timely and — once again! — transparent fashion.

Ukraine is taking essential steps to develop its economy in accordance with international best practices for all its citizens. Yes, the crisis continues adversely to affect Ukraine and its citizens, but it can also show the way to a more vibrant, honest, and transparent economy.

Paul Richardson is the USAID acting director of the Office of Economic Growth of the U.S. Agency for International Development (USAID) in Kyiv. The views expressed in this commentary are the author’s own and do not necessarily reflect those of the U.S. government or RFE/RL.