World Bank Approves $400 Million Programmatic Financial Rehabilitation Development Policy Loan for Ukraine

The World Bank’s Board of Executive Directors today approved the Programmatic Financial Rehabilitation Development Policy Loan 1 (PFRL 1) for Ukraine in the amount of US$ 400 million.

PFRL 1 is the first of two development policy loans designed to address the impact of the financial sector crisis in Ukraine. The first loan aims to restore the stability of the core banking sector in the face of the ongoing crisis, while PFRL 2 will be aimed at restructuring the sector and enhancing the legal and regulatory framework to make it more resilient to future crisis.

The global financial crisis exposed preexisting weaknesses in Ukraine’s banking sector, leading to an acute economic crisis in which GDP is projected to contract by 15 percent in 2009. Pre-existing vulnerabilities in the banking sector came to the fore in late 2008 leading to a systemic liquidity and solvency crisis, including the loss of almost 30 percent of the deposits from September 2008 to May 2009. High loan to deposit ratios funded primarily by external borrowing, currency and terms mismatch, and loan concentration all contributed to the banking crisis.

“We are working with the Ukrainian authorities to provide effective and timely assistance in key areas, such as the financial sector,” said Martin Raiser, World Bank Country Director for Ukraine, Belarus and Moldova. “We hope that our loan will help to bolster confidence in the banking system in Ukraine, and thus lay the foundation for recovery and economic restructuring post-crisis.”

Key elements of reforms supported by PFRL 1 include the creation of a transparent process to ensure that banks are recapitalized with private funding and where that is not possible, recapitalized or resolved with public resources at the lowest possible cost. The reforms also included the recapitalization of three systemically important banks following this process.

In addition, PFRL 1 supports the approval of legal amendments that will make it faster to deal with vulnerable banks and will lower the cost to tax payers. The loan strengthens operations and the design of emergency funding arrangements for the Deposit Guarantee Fund – which insures the savings of depositors.

“The reforms undertaken in the context of PFRL 1 signal the Government commitment to restoring stability in the banking sector and protecting the savings of depositors,” said Aurora Ferrari, World Bank Senior Financial Sector Specialist for Ukraine. Moreover, she adds“The recently introduced legal amendments allow the authorities resolve banks faster, at lower cost, while still protecting depositors. The challenge going forward will be in the implementation of these tools and the completion of the restructuring of the sector.”(EOM)