Supervision that finally supervised

Between 2014 and 2017 the number of banks operating in Ukraine fell by roughly half. That is not a normal thing to happen to a banking system, and understanding why it happened explains a great deal about what followed.

What many of those banks actually were

Not banks in the ordinary sense. A substantial number existed to take deposits from the public and lend them to businesses owned by the bank's own owner. Related-party lending on that scale is not a banking risk; it is a mechanism for converting other people's savings into an owner's working capital.

Others were vehicles for moving money out of the country, and some were essentially empty — capital existing on paper through circular ownership structures.

What supervision did

Required disclosure of ultimate beneficial owners, which is the single most important step. A regulator that does not know who owns a bank cannot identify related-party lending.

Diagnostic reviews of loan portfolios with an honest look at what was actually recoverable. Recapitalisation requirements. And closure of banks that could not or would not meet them.

The cost

Substantial and borne by the public: deposit guarantee payouts, the fiscal cost of nationalising the largest failed institution, and lost confidence that took years to rebuild.

Anyone describing this as a clean success is not describing it accurately.

Why it was still right

Because a banking system full of hollow institutions cannot survive a shock, and a very large shock arrived in 2022. The system that met it was smaller, properly capitalised and honestly supervised, and it held. That is the return on a painful decision taken eight years earlier.

That the survivors of a system half of which closed are still standing shows the supervision did its job — and some of those who paid for it were blameless, which also has to be said. One of our own accounts was frozen. I still think it was right, because every clean-up postponed comes back with a larger bill.