Ukrainian Financial System Development: The Path to EU
Ukrainian Financial System Development: The Path to EU

Summary/Abstract: The paper is based on the comparative analysis of the main characteristics and features of the financial system of Ukraine and Bulgaria, and discusses the issues and prospects of building a modern institutional environment to meet the requirements for European integration, to support economic development and to prevent crisis shocks. The study includes an analysis of the characteristics of financial liberalisation, the dynamics of international investment flows, the requirements of the budget process, in particular the formation of the structure of domestic and foreign debt, the peculiarities of monetary and exchange rate policy.The article determines the characteristic feature of small open economies, that is, the limited development of the institutional environment of the country’s financial sector and a dominant banking sector. The article emphasises that in such terms, the public policy is focused on the development of the banking sector with a gradual increase in its internationalisation. A natural consequence is the large share of state and foreign capital in the financial sector of the economies in transition with the limited development of non-banking and stock market segments. Another feature is the reliance of financial stability on the external financing and inflow of foreign currency, including in the form of external and internal government borrowing and international private transfers.The mentioned peculiarities of the development of the financial systems of Ukraine and Bulgaria show that the institutional weakness of the financial system is due not only to the negative consequences of several financial and economic crises but also to errors in financial system reform policy. Attempts to build the financial system based on accelerated financial liberalisation, focusing on the banking sector separation of the latter from the real sector of the economy, laid the ground for the institutional weakness of the financial system. The authors stress that the elimination of these fundamental imbalances, supported by modernised approaches to monetary and macroprudential regulation, should strengthen the institutional capacity of Ukraine’s financial system, bringing it closer to the requirements of the EU integration.

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