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Ukraine: Stabilizing a Banking Sector in Crisis

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Ukraine: Stabilizing a Banking Sector in Crisis

Ukraine: Stabilizing a Banking Sector in Crisis


After growing by 7 percent on average from 2000 to 2008, Ukraine’s economy contracted by 15 percent in 2009, the local currency—the hryvnia(UAH)— plummeted, and a severe drop in deposits nearly led to the collapse of the banking sector. With the help of the World Bank, the government and the National Bank of Ukraine (NBU) designed and implemented a series of policies that stabilized the system and led to an increase in deposits to pre-crisis levels, orderly liquidation of a number of problem banks, and resumption of bank lending to the economy.



Ukraine was hard hit by the global crisis: the hryvnia, the local currency, plummeted, the economy contracted and the banking sector nearly melted down. In October 2008, depositors — worried about the currency depreciations and poor performance of the banking sector — rushed to withdraw their deposits. Long queues started forming at banks branches and automated teller machines. This situation generated a vicious cycle (the more people queued the more people panicked and queued) and eventually precipitated the banking crisis that gripped the country for months. From October 2008 to April 2009, deposits declined by almost 20 percent. Nonperforming loans grew exponentially, and banking system’s capital base was shrinking fast.


A couple of months into the crisis, the Ukrainian government asked the World Bank for help. The Bank responded by providing technical assistance to the authorities to design and implement a series of policies to stop and reverse the deposit outflow and start structural reforms that would pave the way for a more resilient banking sector. The Bank provided a budget-support loan, under a programmatic series, in September 2009 that was disbursed after the agreed policies were implemented. The policies supporting the loan included a process to assess the health of each bank and, depending on the bank's performance and size, a plan to either recapitalize or close it. In addition, legal amendments were approved to make bank closure cheaper. The Deposit Guarantee Fund (DGF) was equipped with the resources and procedures to process large payouts quickly. At a later stage, during 2010-2011, the program continued to support further strengthening of banking system capitalization, focused on reducing fiscal cost of the crisis, addressed addition of the problem bank resolution function to the mandate of the DGF, and supported adoption of new laws aiming towards a more transparent and better supervised banking system.


With implementation of program measures, the overall massive bank deposit outflow, observed at the initial stage of the crisis, stopped in April 2009. By end of May 2010, the nominal volume of bank deposits exceeded the pre-crisis levels, signaling a recovery of confidence in the Ukrainian banking sector (see Table 1). Almost 6 million household depositors regained access to their deposits in banks either recapitalized by the state or timely intervened by the NBU, or were paid out by the DGF.





TOTAL DEPOSITS (in billions UAH )




TOTAL DEPOSITS (in billions USD )








Note: notwithstanding the nominal growth of deposits in UAH (largely influenced by hryvna depreciation), the volumes of UAH and USD deposits taken separately only reached their respective pre-crisis levels in September 2010

Two rounds of diagnostic and stress testing of over 180 banks were conducted in 2009 and 2010, with 62 banks (including the 26 largest) requested to increase capital to meet 10 percent Capital Adequacy Ratio (CAR) based on the diagnostic results. Paid-in capital of banks increased by 76.95 percent or UAH 64.4 billion during 2009-2010, with regulatory capital (adjusted for risks and loan losses) increasing by 30.7 percent during the same period.

Since October 2008, the NBU has intervened in close to 30 problem banks, resulting in provisional administration in 27 banks, liquidation of 19 banks, change in private ownership in 4 banks (including one of the largest banks), and nationalization of 3 systemic banks.

Cost of bank closure was reduced through legal amendments to the Banking Law, Civil Code, Joint Stock Company Law, and Bankruptcy Law. Legal amendments to the Banking Law, with requirements for disclosure of ultimate controllers, have been enacted in early 2011. The draft law on consolidated supervision of banking groups has been adopted by Parliament in the first reading at the end of 2010 and is expected to be enacted by mid-2011.

Capacity of the DGF to ensure timely payouts of insured deposits has been strengthened. A procedure. It was arranged that in case of emergency, the DGF could immediately access funding from the NBU in the amount of UAH 5 billion or up to 150 percent of the DGF capital, which would be sufficient to cover the insured deposits payout for 25-30 medium and small banks. An additional UAH 1 billion was received by the DGF from the gGovernment in early 2010. A new law on the DGF has been drafted. Once enacted, it will enhance problem bank resolution to minimize systemic risks and reduce resolution costs, and would expand DGF powers in the area of bank resolution in addition to its existing function of insured deposits payout.


We were staying in lines. It was panic. We knew nothing about the future of the bank and of course either about our money. That lasted probably three or four months. 

— Irina Davidova – Depositor that eventually managed to recover her money thanks to the program

Bank Contribution

In 2009, the Bank approved a US$400 million Development Policy Loan (DPL) to support the anti-crisis banking sector program of the Ukrainian authorities.Another loan in the Development Policy Loan (DPL) series, in the amount of US$350 million, was under preparation as of March 2011. Preparation of both DPLs was strongly underpinned by specific and relevant technical assistance to the key counterparts – the Ministry of Finance, the NBU, and the DGF


The World Bank has worked closely with the Cabinet of Ministers, Ministry of Finance and the NBU in developing a crisis response strategy. The DGF has received significant technical assistance for its institutional development within the program. In providing support to the Ukrainian authorities on developing and implementing the Banking Sector Program, the Bank collaborated very closely with the International Monetary Fund (IMF) and the United StatesAgency for International Development (USAID).


The immediate beneficiaries of the program were almost 6 million depositors who regained access to their deposits.Other beneficiaries include millions of other bank depositors and creditors whose savings were kept intact, as well as bank borrowers who now have renewed access to banking sector products and services.

Toward the Future

While, the banking stabilization program has been successful, deposits have gone back into the system, and the current stock of deposits is higher than before the crisis, more remains to be done to complete the restructuring of the sector. The World Bank is assisting the Ggovernment of Ukraine in this effortunder the Programmatic Financial Rehabilitation Development Policy Loan 2 (PFRL 2). Structural reforms that underpin PFRL 2 include: completion of a secondround of stress testing for the banking sector to ensure that it is capitalized after a year of economic contraction and exit of insolvent banks; legal reforms to transfer bank resolution powers to the DGF; and restructuring and exit of the government from the systemic banks recapitalized with public funds;and enhancement of bank supervision.

For more information, please visit the Projects website.

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