In 2014–2015, the Ukrainian banking sector experienced a deep financial crisis. To prevent the risks of a recurrence of such a large-scale distress, the National Bank of Ukraine changed its regulation approach towards a strict intolerance regarding financially weak and opaque banks, and launched the development of its macroprudential regulation concept. The new rules above all focused on stronger requirements for credit risk assessment, lending to related parties, and disclosure of the banks’ ownership structure. These measures have enhanced the banking sector’s resilience, but simultaneously forced banks to recognize significant crisis-related costs. Some banks were unable to cover these losses with their capital, which led 90 banks, accounting for about a third of pre-crisis banking assets, to be recognized as insolvent or withdrawn from the market for other reasons. This raised concerns that stricter regulation may come at the cost of restrictive credit conditions for the economy more generally.

In our research, we question whether stricter regulation could have a negative impact on lending availability. We answer this question by examining a broad set of loan, bank, and borrower characteristics based on bank-firm-loan level data merged with information from borrowers’ financial statements. We specifically consider four questions, with a particular interest on new loans for corporate borrowers in the national currency.

How have bank lending conditions changed following the cleanup of the banking sector?

We cannot conclude that lending conditions have been definitely tightened after the cleanup of the banking sector. On the one hand, banks reduce the concentration of portfolios in response to stricter regulatory requirements, primarily for lending to related parties, thereby decreasing the loan sizes on average. On the other hand, loan interest rates declined due to monetary policy easing. As the risks for banks gradually decreased over time, interest spreads also narrowed, leading to lower loan prices. At the same time, banks significantly tightened conditions for loss-making firms, with lower loan size and higher and interest rates.

How have banks changed the requirements for the financial stance of firms after the banking sector cleanup?

We assess firms’ financial stance by focusing on profitability and indebtedness. We find that banks have a greater preference for profitable firms when issuing loans compared to the period before the banking sector cleanup, and that this effect persists over time. Among the firms financed by banks in the post-crisis period, the leverage ratio decreases in the long run, whereas the return on equity ratio declines. The return on assets ratio goes up, especially in the short term. As the share of profitable firms increases, the return on firms’ assets rises, but at the same time, lower leverage leads to a fall in return on equity.

Thus, bank requirements for financial performance of corporates become more stringent and generally do not revert back to pre-policy levels over time.

What factors influence a firm’s ability to obtain a loan from a new bank after its bank was closed?

The results suggest that the crucial factors for corporate borrowers, whose previous bank closed, to receive a loan from a new bank are firm profitability at the time of a new match, and the quality of loan servicing in the closed banks that used to finance the firms.

The average time to receive a new loan from a healthy bank (that never closed) is twice that from a weak bank (that closed later). Both weak and healthy banks prefer firms that did not have loan defaults in their previously closed banks. At the same time, the chances of obtaining a loan for profitable borrowers is considerably higher from healthy banks, in contrast to weak banks where the profitability factor turned out to be insignificant. We also find that return on assets and firm-bank multiple relationships are positively associated with the chances of new matches. However, we do not reveal any evidence of the empirical effect of firm size and leverage ratio.

Have lending conditions changed for firms experienced their bank closure compared with those that did not?

Our analysis of firms that faced bank closures showed that their performance deteriorated after the banking sector cleanup compared to firms whose banks did not fail. While banks were willing to lend to such firms, these loans were of smaller size and at higher interest rates.

In conclusion, the study findings create the basis for extensive future research into the influence of changes in the financial system and the macroeconomic environment on bank lending conditions. The results provide a deeper understanding of credit market trends, allowing the most relevant measures to be applied to help banks continue and expand lending to financially support the Ukrainian economy.

Bazhenova, Y. (2023). Effects of Banking Sector Cleanup on Lending Conditions: Evidence from Ukraine (IHEID Working Papers No. 06-2023). Economics Section, The Graduate Institute of International Studies. https://bccprogramme.org/wp-content/uploads/2023/04/HEIDWP06-2023-Bazhenova.pdf