The reform of the financial system will not have as much impact as was hoped, and there are doubts about whether it will be effective at all. It appears as though the Ministry of the Economy has embarked on a mission to perform a general and widespread cleanup of the sector, as if provisions were the only necessary remedies for the industry?s major ills. In reality, the issue is not so simple.
It is true that a prudent level of deposits is helping to clean up the banks? balance sheets in addition to limited the risk of unforeseen losses, but the government has decided to base reforms on raising capital reserves without making sure that each and every bank scrupulously complies with current requirements.
Requiring new provisions is further punishing those lenders who have been compliant in light of their creative techniques for demonstrating that compliance. Far more worrisome is that the rubric for deciding whether a lender is in trouble depends on whether it covers itself with the new conditions. Essentially, can the banks generate profits?
A considerable amount of the banks? margins are created artificially through refinancing. If a bank is not capable of turning profits then it should be allowed to fail. And the sooner the better. We should not run the risk of merging unhealthy institutions or pumping them full of Frob funds until they show stellar capital to debt ratios and hefty provisions if they cannot prove the ability to make money. This reform depends on hopes that merged banks will gain access to credit markets.
Just because a group of banks gets bigger does not necessarily mean they can get financing any easier. Nor does it mean that they will be able to provide credit. It could mean that they will be a bigger problem than before.
