We need more regulations: on the standards of banking

Alexander Rechitskiy: In my opinion, the effect of this transition on Ukrainian banks will be indirect. Most likely, only banks with foreign capital will adjust their activities in accordance with the new standards. As for the rest of the banks, as of now not all of them operate based on Basel II, not to mention Basel III. In any case all changes will be divided into phases. And we should start at the legislative level, with the integration of national regulation and supervision into European and world systems.

Interviewer: How would you assess the development of national banking laws compared with other countries? Are there any positive developments towards international standards?

Alexander Rechitskiy: I personally came face to face with the requirements of European supervision and regulation of the banking system as I became Head of the Supervisory Board of European bank Versobank AS. I was immediately amazed by the sheer volume and detail of legislation in this area along with the clarity of rules and requirements as well as maturity of established procedures.

As a member of the Board of Ukrainian bank Aktabank I’m safe to say that the isolation of national norms and standards is quite noticeable. Even if we take a look at developing of correspondent relations with foreign financial institutions, lack of coordination of banking standards and regulatory requirements does not raise the level of confidence in Ukraine or facilitate cooperation.

Recent regulatory initiatives can turn out for the best for the development of the sector. For example, the transition of banks to the IFRS turned out to be a positive experience. Draft amendments to the Rules of registration of correspondent accounts, in which Ukrainian banks are to be banned from having correspondent relationships with foreign banks with a rating below investment grade,[1] should increase the transparency of interbank relationships. As a matter of fact, Ukraine is dealing with a pressing problem of existence of technical banks, funds withdrawal from the country. This problem must be addressed. We need more regulations. It is also advisable to balance the requirements for resident banks and banks with foreign capital, and raise the level of requirements for the fourth group banks.

Interviewer: Rather recently corporation Alef became the major shareholder of European bank Versobank AS, which you mentioned before. For national business such a case is uncommon so to speak, and one can count such cases on the fingers of one hand. Therefore it would be interesting to learn the details.

Alexander Rechitskiy: The bank has been operating in the territory of Estonia since 1999. Up to March 2012 the controlling stake of Versobank was owned by Cyprus Popular Bank Public Co Ltd (formerly known as Marfin Popular Bank Ltd). After the acquisition of the controlling stake, we did an overall rebranding changing the name to Versobank AS. It wasn't only the name that was changed but also the strategy of the bank. Versobank started focusing on the individual approach to every client, it is now actively engaged in services for non-residents of Estonia offering a wide range of financial services, and developing Private Banking services.

Interviewer: Does Versobank AS have international rating?

Alexander Rechitskiy: Versobank AS doesn't have a credit rating simply because acquisition of such rating is expensive and makes sense when the bank starts operating globally. After the crisis the confidence in international rating agencies has essentially shaken. If you recall Lehman Brothers, its high rating hadn’t changed up till the bankruptcy. Before the crisis both investors and supervision authorities relied too much on the ratings of professional agencies, especially when making decisions on regulation of capital and access to discounts of central banks.

The absence of a rating can’t be an indication of unreliability of the bank. There are a lot of small and medium-sized banks in Europe that don’t have a rating, but operate in compliance with all legal and regulatory requirements. For example, as for capital adequacy requirements, the minimum capital adequacy ratio according to the Bank of Estonia is 10%, capital adequacy ratio of Versobank at the moment amounts to 35.7%. This is almost 10% higher than in this very period in 2011 when corporation Alef wasn’t the majority shareholder of the Bank. All of it gives evidence of improved and more efficient risk management of the bank as well as funds available for credit financing.

Interviewer: So international practice of financial system regulation does have its flaws?

Alexander Rechitskiy: Is there anyone or anything that doesn’t? If everything was perfect, there wouldn’t be any crises. Basel III isn't a rescue from all troubles. New standards have significant drawbacks not excluding the possibility of the crisis reoccurrence. For instance, Basel III focuses on the bank capital cover, even though this approach hasn't proved to be helpful. Once again Lehman would be a perfect example here - its Tier I capital was 11% a day before the collapse. Banks respond to the higher cost of capital by simply removing certain activities from their balance sheets and transferring them to the "shadow banking system", where capitalization rules do not apply.

As in Basel II it is implied that while evaluating potential risks banks should rely on their own internal evaluation models. Risk ratios allow banks to create too high effective leverage. According to Basel III banks are required to hold the shares against their risk-weighted assets. This encourages them to search for assets with low risk, which will continue to be government bonds with at least AA rating. Sad experience with Greece is a reminder of overreliance on rating agencies evaluation.

Interviewer: I don't envy Greece. But I wonder how Estonia is doing. Surely choosing the country for such a serious investment like buying a bank must be justified, right?

Alexander Rechitskiy: Certainly. In terms of these popular ratings credit rating of Estonia according to Standard & Poor's is AA. Estonia is a European state with good reputation. Due to local regulations, Versobank guarantees high security level, opening of multi-currency accounts, large number of transactions and account management via internet banking. Having an account in Estonian bank is a good thing in terms of investment opportunities. Buying of an operating bank in a reliable country contributes to the ability of opening of correspondent accounts with major international banks. In particular, we established good relations with Sberbank of Russia, Deutsche Bank, Raiffeisen Bank International, and Commerzbank, which allows maintaining a high speed of payments and their optimal cost for customers. 

Interviewer: To summarize, can we say that management of European and Ukrainian banks in a real sense enables us to compare legal requirements and business practices?

Alexander Rechitskiy: Management of Versobank has indeed showed how European financial and credit institutions operate in practice. For example, the development of all internal procedures is in strict accordance with the FATF[2]requirements in terms of anti-money laundering and anti-terrorist financing legislation. I'm pleased to see that Ukraine is taking steps in this direction, as since the adoption of several laws on anti-money laundering in 2011 by Verkhovna Rada, FATF removed Ukraine from its "black list." Stricter regulation, deep detail of regulatory standards and requirements, and striving to cover more directions of financial activity describe the worldwide trend. There is such a trend for obvious reasons, and it is better that our country develops its legislation in line with general trends and in accordance with international standards.