Alexander Paraschiy
Head of Research
[email protected]
+38 044 391 55 77

Operation of transformation. What is the basis of NBU reform?

The staff list optimization is the main goal of "transformation" of the National Bank of Ukraine. It is expected to cut down the number of NBU more than twofold: from 5,300 to 2,000 persons. It is an open truth that an overstaffed organization has great downsizing prospects. But to link the number of employees of the Central Bank to the number of operating banks is to demonstrate a complete misunderstanding of the institutional functions of an agency “reformers” work for.

Indispensable attributes of any "successful reform strategy" in our country are:

- an appeal to the European (international) experience, suggesting that the reform sponsors have studied such experience in details. In addition, it is very easy to “sell” such valid argument to their superiors at any level. No one will contest the need to strive to Europe;

- support of the reform plan with infographics. This should imply the innovative nature of reformers, seriousness of their intentions (infographics is a time-consuming task), and a depth of understanding of the process by authors.

These are two pillars of the recently announced plan of internal transformation of the National Bank of Ukraine, which is recognized by many foreign experts as the most reformatory institution in our country. But the pillars look reliable in a picture only. A closer look reveals that authors of this "reform" have a poor understanding of the "materiel".

Peer comparison should be used carefully

If any NBU reformers were to apply for my analyst positions (which I cannot exclude in view of their reduction plans), I’ll reject them without the aid of sight. And that's why.

The peer comparison method is one of the simplest tools of any investment bank analyst. But it is the most insidious, especially in a prentice hand. Unpracticed hands, for example, may conclude that one Zaporozhets should cost as much as a Mercedes (both are the cars). And elaborate their development strategy on the basis of this assumption. Such "deep" analysis underlies the NBU plan. To estimate the number of specialists to be fired, they just appeal to the "international experience".

The world experience, according to NBU experts, indicates that Ukraine should have 22 employees per each operating bank. This figure is supported by an average number of central banks (CB) employees per one commercial bank in 17 countries selected by the reformers for infographics. Obviously, this figure forms the basis of the new HR strategy of the National Bank. But there are evident drawbacks of such experience.

Fig. “Analysis” of the world experience: the number of CB employees per one operating bank

As seen from the chart, figure 22, or an average of 17 countries, says nothing.

Very few of the selected countries (only the Czech Republic, Japan and Canada) have a target ratio of CB staff to the number of banks. Ratios of the remaining counties differ significantly.

An average figure is an approximate one. Add several Turkeys, and you’ll get a greater figure. Remove Turkey and Russia from the chart (or take only Europe), and you’ll receive half the number.

The huge spread of ratios (72 times between Turkey and Finland) should have alerted the NBU specialists. And apparently it did, as they failed to present ratio in their infographics, just a nice picture with flags. But perhaps it was done, and they could not give up their conclusions, keeping path of the reforms. Reformers ignored the popular wisdom saying “score twice before you cut once”.

Try to understand what should have got attention of authors of the new reform.

NBU functions and banks

The study of HR "essence" must begin with an analysis of the NBU functions. The word "bank" in the NBU title is misleading even for employees of the institution. Their subconscious mind says that they are working at the most important bank in the country and their well-being depends on the number of banks under control.

But, according to the profile law, the main function of the NBU is to ensure the hryvna and price stability. Support of financial (including banking) stability and economic development are important tasks, but if complies with the main goal only. The Law defines another 30 functions of the NBU, only 11 of which relate to banks or the banking system. Therefore, it is clear that banks - and let alone their number – are not as important as the NBU reformers believe.

Functions of the comparable central banks

Once again, recall the peer comparison. The comparable central banks should have the comparable functions and powers. Otherwise, we stoop so low as to compare cucumbers and tomato.

If the NBU reform authors had really studied the world experience, they would have known that central banks of some selected countries did not perform such a resource-intensive function as banking supervision. That is, the central banks of such countries such as Poland, Canada, Turkey, Norway, Finland, Japan and South Africa, have even less relevance to banks in their countries than the NBU.

Next, reformers should had known that the central banks (or other controllers) of EU Member States share authority of the banking supervision with the European Central Bank. The European Central Bank is also responsible for the price and rate stability (and this is the main function of the National Bank of Ukraine) in all EU Member States. In our sample, these are Finland and Germany. Which one shall we compare Ukraine with?

Bank as a measurement unit

I guess, just for fun, one may measure the length of a snake in parrots or the state of the financial system in a number of banks. But it is not always reasonable to draw conclusions of such measurements.

How can we rank PrivatBank (21% assets of the banking system of Ukraine) together with Portal Bank (0.01% of total assets)? This logic suggest that PrivatBank, looking at 160 employees of Citibank, should consider optimization of its 20,000 employees. And the number of banks in Ukraine, as our experience shows, is far from constant.

Summing up, I have a hope that authors of this transformation would never be admitted to development of reforms initiated by the National Bank having greater social relevance.