Har­ri­son: Gov­ern­ment has role to play in en­cour­ag­ing sav­ings

Kyiv Post - - Opinion - Eu­gene Har­ri­son, an in­for­ma­tion tech­nol­ogy ar­chi­tect, can be reached at sap­[email protected]­hoo.com.

soon would have few de­pos­i­tors and close down. Com­pet­i­tive bank­ing would drive a mar­ket for lend­ing and a mar­ket for lend­ing would bring about eco­nomic re­form.

How does a mar­ket for lend­ing bring about eco­nomic re­form? As de­pos­i­tors see their as­sets rise they will want to in­vest and di­ver­sify into real es­tate and other com­mer­cial ven­tures. The banks would then lend to sat­isfy this de­mand, in­creas­ing their in­vest­ment port­fo­lio and brand. Both the banks and de­pos­i­tors would want to see that their in­vest­ments are safe and sta­ble.

We would soon see the fol­low­ing re­forms: • Clear and trans­par­ent own­er­ship of

real and trade prop­erty; • Clear and trans­par­ent as­sign­ment of liens and se­cu­rity in­ter­est in prop­erty; • A swift, pre­dictable and ac­ces­si­ble

le­gal sys­tem; • A crack­down on cy­ber crime; • A tax sys­tem that en­cour­ages small

and mid-sized busi­ness; • A re­li­able au­dit­ing in­dus­try; • An ef­fi­cient and trans­par­ent sec­ondary mar­ket to pro­vide liq­uid­ity; and in­vest­ment. Yes, all this sounds won­der­ful so how do we get there? We would need the back­ing of the Ukrainian gov­ern­ment and per­haps the In­ter­na­tional Mon­e­tary Fund. In Amer­ica we have a few public-pri­vate in­sti­tu­tions that as­sist the above model.

The Fed­eral De­posit In­sur­ance Cor­po­ra­tion guar­an­tees de­pos­i­tors the se­cu­rity of sav­ings in bank ac­counts. In the U.S., the de­posit in­sur­ance amount is $250,000 per bank. I per­son­ally feel this amount of in­sur­ance is need­lessly high and should be about 20-25 per­cent above the av­er­age sav­ings amount per house­hold in to­tal. If the Ukraine gov­ern­ment in­sured de­posits to qual­i­fied banks up to 125 per­cent of the av­er­age es­ti­mated sav­ing amount per Ukraine house­hold, let’s just say $20,000, Ukraine banks would see a flood of de­posits. Two changes would hap­pen rather quickly.

De­pos­i­tors, banks and the gov­ern­ment would very quickly de­mand the po­lice put an end to cy­ber­crime as loses would not be tol­er­ated by any­one.

The banks would then have to find the re­sources to pay re­turns to de­pos­i­tors or risk los­ing de­pos­i­tors and go­ing out of busi­ness. Lend­ing starts.

Hous­ing is gen­er­ally the first place de­pos­i­tors want to in­vest to di­ver­sify and is also the first place banks want lend to gen­er­ate re­sources and build a port­fo­lio.

The Fed­eral Hous­ing Au­thor­ity (FHA) es­tab­lishes guide­lines of how banks should lend to home­buy­ers and in­sures loans that are FHA com­pli­ant. Be­cause the lend­ing stan­dards are the same from re­gion to re­gion the loans can be traded on a sec­ondary mar­ket among banks to di­ver­sify the bank’s port­fo­lio and pro­vide liq­uid­ity. The sec­ondary mar­ket would re­quire a num­ber of re­forms re­lated to own­er­ship of ti­tle, trans­parency of liens se­cured by real prop­erty, re­li­able Au­dit­ing and a pre­dictable le­gal sys­tem.

Now imag­ing we got all this work­ing, what’s next? Small and mid­sized busi­nesses start to flour­ish. As de­pos­i­tors di­ver­sify through in­vest­ment in real es­tate, de­mand for skilled la­bor and ma­te­ri­als will in­crease. Some de­pos­i­tors will want to di­ver­sify be­yond real es­tate and take ad­van­tage of hous­ing de­mand by open­ing con­struc­tion and other busi­nesses.

The Small Busi­ness Ad­min­is­tra­tion works the same way as the FHA only they in­sure com­mer­cial loans to new or ex­pand­ing busi­nesses. The SBA has a set of stan­dard­ized lend­ing cri­te­ria for dif­fer­ent in­dus­tries and com­pany sizes. This stan­dard­iza­tion of SBA lend­ing re­quire­ments would re­form how busi­nesses use credit to buy and sell cap­i­tal equip­ment and in­ven­tory. It would also lead to stan­dard­iza­tion of ac­count­ing prac­tices and re­li­able au­dit­ing.

One point that is dis­tinct for the SBA is that is usu­ally re­quires that the busi­ness hire and re­tain a cer­tain num­ber of em­ploy­ees as a con­di­tion for the loan in or­der to re­duce un­em­ploy­ment.

The way I see it is that Ukraine eco­nomic re­forms will have to come from the bot­tom up. In­di­vid­ual de­pos­i­tors look­ing to di­ver­sify their port­fo­lios and banks look­ing to se­cure their loans will have a grass­roots ef­fect stronger than any po­lit­i­cal slo­gan. But to get this started the Ukraine gov­ern­ment will have to get be­hind the banks and guar­an­tee the se­cu­rity rea­son­able amount of sav­ings to en­cour­age de­pos­i­tors. To do this the IMF may need to get be­hind the Ukraine gov­ern­ment.

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