PROBLEM BANKS: THE ESSENCE OF THE CONCEPT AND THE PROCESS OF THEIR EMERGENCE

Abstract

The article is dedicated to the analysis and improvement of the economic concept of a problem bank, as well as the structuring of the process of forming problem status to prevent a bank from becoming insolvent. It examines scientific and methodological approaches to defining a problem bank and notes a trend towards their unification. Given the normative diversity of criteria for classifying banks as problem ones, it is proposed to consider this concept in both broad and narrow senses. The broad interpretation is associated with legislative requirements and must take into account all the criteria by which a bank is classified as troubled, both mandatory and at the discretion of the National Bank. This definition is more legal than economic in nature. In the narrow sense, the authors define a problem bank as a banking institution whose financial condition is unsatisfactory, characterized by insufficient charter or regulatory capital, inability to meet the demands of depositors and creditors, including failure to comply with the mandatory reserve formation procedure, or losses resulting from overly risky activities or transactions with related parties that do not meet regulatory requirements. It is noted that the signs of problem do not arise suddenly but result from certain circumstances, with their destructive potential gradually accumulating. The authors propose structuring the process of a bank’s problem status formation into four stages: potential, hidden, obvious, and critical. It is shown that potential problem status refers to a situation where it is not yet identified, but there are already certain external and internal prerequisites for its emergence. Hidden one is already present but is either not clearly recognized or not acknowledged by the bank’s management. The stage of obvious problem status occurs when the bank begins to violate economic standards and significantly increases the riskiness of its activities. This stage represents the last phase of the bank’s crisis development, where there is still a possibility to restore stable operations. The stage of critical problem status leads to the bank being classified as insolvent.