A banking system that made money in wartime

One of the more surprising features of the Ukrainian economy in this period is that the banking system has been consistently profitable. This deserves explanation rather than either celebration or suspicion.

Where the profit comes from

Not primarily from lending. Corporate credit demand fell and risk appetite fell with it, so banks lent less to businesses than before.

The earnings came from two sources. Deposits grew substantially, because households and companies held cash and had limited alternatives, and banks paid relatively little for those deposits while placing the funds in government securities and central bank instruments that yielded considerably more. That spread, on a large and growing balance sheet, is most of the answer.

The second source is transaction fees, on payment volumes that grew sharply as cashless payment expanded.

Why this is not a scandal

A profitable banking system absorbs losses without recapitalisation from the state. Ukrainian banks have absorbed substantial credit losses from occupied territories and destroyed collateral without a systemic failure, precisely because they were earning. A loss-making banking system in these conditions would have required a bailout the budget could not afford.

The legitimate question

Whether profits earned largely from holding government paper should be taxed at a higher rate during a war, which Ukraine did. Reasonable people disagree about the level, and the debate is a real one rather than populist.

What matters going forward

Whether those balance sheets turn back towards lending. A banking system that earns comfortably from government securities has limited incentive to lend to a medium-sized manufacturer, and reconstruction needs it to.

The banks are profitable not because they lend but because they do not — the money sits in government paper earning a risk-free return. I feel that as a company applying for credit: you are not refused, the terms simply make it unworkable. The legitimate question is when that profit turns back into lending to the real economy.