Analysis of the Impact of State-Owned Banks on the Sustainability of Public Finances
Round 1
Reviewer 1 Report
The topics addressed in the article, concerning the impact of banks controlled by public capital on the stability of public finances, are extremely topical and important in the perspective of current economic conditions. The author/authors conducted a research based on the Ukrainian market, taking into account primarily data from 9 banks (Oschadbank, Ukreximbank, Kyiv Bank, Ukrgasbank, Rodovid Bank, Ukrainian Bank for Reconstruction and Development, State Land Bank, Settlement Center, Privatbank) during the research period covering 2009-2022.
The research hypothesis was correctly formulated, stating that state-owned banks have an impact on the stability of public finances in Ukraine in terms of cash flows between state-owned banks and public funds. Appropriate research methods were used, including an in-depth literature review, data analysis (individual and sectoral), correlation tools. The research methods are not statistically advanced, but correctly selected for the scope of analysis.
The literature used in the article is correctly selected, diverse and up-to-date. However, there are editorial carelessnesses in the References section (e.g. lack of spaces, inconsistency in citing journal numbers and volumes), which should be corrected before publication.
The analysis carried out is a valuable study; however, in interpreting the results of the research, it should be taken into account that the object of the research is the banking sector in the country, which has been subject to armed action to varying degrees since 2014, and that the banking sector operating in a wartime environment performs to a greater extent tasks in the area of maintaining financial stability, hence the attempt to assess the sector and the public assistance provided to it only through the categories of economic efficiency runs the risk of overinterpreting the conclusions.
Author Response
Dear Reviewer,
Thank you very much for the great feedback on our paper. It was very helpful and constructive. We have addressed all your inputs and provide detailed responses below. The paper has improved substantially due to your inputs. Note that overall, we have sharpened and polished the paper considerably. We have therefore not used track changes but can provide version comparisons if you wish. We look forward to receiving your feedback on this revised version of the paper.
Point 1: The topics addressed in the article, concerning the impact of banks controlled by public capital on the stability of public finances, are extremely topical and important in the perspective of current economic conditions. The author/authors conducted a research based on the Ukrainian market, taking into account primarily data from 9 banks (Oschadbank, Ukreximbank, Kyiv Bank, Ukrgasbank, Rodovid Bank, Ukrainian Bank for Reconstruction and Development, State Land Bank, Settlement Center, Privatbank) during the research period covering 2009-2022.
The research hypothesis was correctly formulated, stating that state-owned banks have an impact on the stability of public finances in Ukraine in terms of cash flows between state-owned banks and public funds. Appropriate research methods were used, including an in-depth literature review, data analysis (individual and sectoral), correlation tools. The research methods are not statistically advanced, but correctly selected for the scope of analysis.
Response 1: We would like to express our sincere gratitude for your thoughtful and constructive feedback on our paper.
Point 2: The literature used in the article is correctly selected, diverse and up-to-date. However, there are editorial carelessnesses in the References section (e.g. lack of spaces, inconsistency in citing journal numbers and volumes), which should be corrected before publication.
Response 2: Amendments have been made in the References. (lines 706,713, 718, 720, 731, 733, 738,740, 750, 756 et al).
Point 3: The analysis carried out is a valuable study; however, in interpreting the results of the research, it should be taken into account that the object of the research is the banking sector in the country, which has been subject to armed action to varying degrees since 2014, and that the banking sector operating in a wartime environment performs to a greater extent tasks in the area of maintaining financial stability, hence the attempt to assess the sector and the public assistance provided to it only through the categories of economic efficiency runs the risk of overinterpreting the conclusions.
Response 3: We would like to thank you for commenting. We recognize the importance of considering the impact of armed actions on the banking sector in the country since 2014. The ongoing armed actions and the war-like environment have had a significant impact on the operations and functioning of the banking sector in Ukraine. As you rightly pointed out, state banks in such circumstances tend to prioritise tasks related to maintaining financial stability, and their role may extend beyond conventional economic functions. In our analysis, we highlighted two peculiarities of state banks in Ukraine, namely the absence of a social function and the absence of defence financing. While these characteristics are relevant in the context of a peacetime environment, we recognise that they may not fully capture the complexities and challenges that state banks face during periods of armed conflict and war. As you suggest, we agree that assessing the sector and the public support provided to it solely on the basis of economic efficiency categories runs the risk of over-interpreting the conclusions. It is important to recognise that state banks operating in a wartime environment may temporarily shift their priorities to support financial stability and contribute to the defence needs of the country. Given the dynamic and evolving nature of the banking sector in a wartime context, we acknowledge that our analysis could benefit from a more comprehensive examination of how state banks adapt and function under these challenging circumstances. Future research should delve deeper into understanding the changing roles and responsibilities of state banks during periods of armed action and how they align with the broader goals of financial stability and defence financing.
Reviewer 2 Report
Journal: Economies
Article title: Analysis of the impact of state-owned banks on the sustainability of the public finances
Manuscript ID:
General Comments:
This article studies the Ukraine's state policy concerning state-owned banks and evaluate their impact on the sustainability of Ukraine's public finances. The authors used an empirical study of the cash flow of public funds to state-owned banks and the reverse cash flow to determine the impact of the activity and stability of public finances. The authors reached the conclusions that the costs associated with recapitalizing state-owned banks disrupt the stability of public finances, create additional debt dependency for Ukraine, impose an additional burden on public finances, and lead to structural changes that reduce funding for social spending.
Overview:
The paper is very good written and the empirical work does appear to be carefully and correctly done. The research question is very good and it does make a sufficient new contribution to the literature to be suitable for the Economies ONLY after MINOR revisons.
In fact, the literature on the relationship between impact of state-owned banks on the sustainability of the public finances is quite new.
The MAJOR contribution of the paper is the analysis of the relationship for the cash flow of public funds to state-owned banks and the reverse cash flow to determine the impact of the activity and stability of public finances in Ukraine. The paper is very interesting; and in my view, it needs to be MINOR improved to reach the standard required for publication in this journal.
Specific Comments:
1. Introduction: two paragraphs about the Ukrainian bank system and state owned banks
2. Methodology: why the authors have used ONLY this country, Ukraine? Moreover, not others?
3. Methods: very good
4. Policy implications?
General considerations: the idea of the article is very good and the construction of the article is adequate.
I ONLY recommend this article be published in Economies after MINOR revisions (explanation for just only one country and the discussions).
Author Response
Dear Reviewer,
Thank you very much for the great feedback on our paper. It was very helpful and constructive. We have addressed all your inputs and provided detailed responses below. The paper has improved substantially due to your input. Note that overall, we have sharpened and polished the paper considerably. We have therefore not used track changes but can provide version comparisons if you wish. We look forward to receiving your feedback on this revised version of the paper.
General Comments:
This article studies the Ukraine's state policy concerning state-owned banks and evaluate their impact on the sustainability of Ukraine's public finances. The authors used an empirical study of the cash flow of public funds to state-owned banks and the reverse cash flow to determine the impact of the activity and stability of public finances. The authors reached the conclusion that the costs associated with recapitalizing state-owned banks disrupt the stability of public finances, create additional debt dependency for Ukraine, impose an additional burden on public finances, and lead to structural changes that reduce funding for social spending.
Overview:
The paper is very good written and the empirical work does appear to be carefully and correctly done. The research question is very good and it does make a sufficient new contribution to the literature to be suitable for the Economies ONLY after MINOR revisons.
In fact, the literature on the relationship between impact of state-owned banks on the sustainability of the public finances is quite new.
The MAJOR contribution of the paper is the analysis of the relationship for the cash flow of public funds to state-owned banks and the reverse cash flow to determine the impact of the activity and stability of public finances in Ukraine. The paper is very interesting; and in my view, it needs to be MINOR improved to reach the standard required for publication in this journal.
Response: We would like to express our sincere gratitude for your thoughtful and constructive feedback on our paper.
Specific Comments:
Point 1: Introduction: two paragraphs about the Ukrainian bank system and state-owned banks
Response 1: Thank you very much for your valuable feedback. We have carefully considered your suggestions and agree that the introduction should provide a clear and comprehensive overview of the Ukrainian banking system and its state-owned banks. To this end, we have made the necessary revisions to ensure that the Introduction appropriately sets out the context and background of our study.
Point 2: Methodology: why the authors have used ONLY this country, Ukraine? Moreover, not others?
Response 2: We sincerely appreciate your thoughtful feedback on our research methodology. Your question about the choice of Ukraine as the sole focus of our study is valid, and we are grateful for the opportunity to address this point. The decision to use only one country, Ukraine, as the subject of our research was a deliberate one, driven by several considerations that we would like to explain. By focusing exclusively on Ukraine, we wanted to conduct an in-depth analysis of the specificities of state-owned banks in a specific context. Each country's banking sector operates within a unique economic, political, and social framework, and an in-depth examination of a single country allows us to delve deeply into its intricacies. The Ukrainian banking system faces a particular problem: it is operating in a time of war. So, we want to analyse this unique case. Covering several countries could dilute the research focus and limit our ability to draw robust conclusions.
Point 3: Methods: very good
Response 3: We would like to express our gratitude for your thoughtful and constructive feedback on our study.
Point 4: Policy implications?
Response 4 Thank you for your insightful comment on the policy implications of our research. We agree that addressing policy implications is an essential aspect of any academic study. In our research, we focused on analyzing the specificities of state banks in Ukraine, in particular the absence of a social function and the absence of defence financing. While our primary objective was to provide a comprehensive understanding of these specific aspects of state banks in Ukraine, we recognize the importance of discussing potential policy implications that may arise from our findings.
Thank you for your time and consideration.
Reviewer 3 Report
My comments on the paper - Analysis of the impact of state-owned banks on the sustainabil- ity of the public finances - are as follows.
The paper presents an interesting analysis and we consider that the research is of interest. However, as it stands, the paper needs revisions.
The abstract is clear, presents the purpose of the paper and the results of the research.
The keywords are appropriately chosen.
The introduction provides the necessary background information and states the objectives of the paper but the author does not mention the added value of the paper. In the introduction it must be stated the added value that the paper brings to the existing academic literature. What is the main contribution of this study?.
The research methodology used by the author is adequate for the approached subject.
The structure of the paper is appropriate and the discussions are significant.
The references used by the author are appropriate.
We recommend indicating the references for figure 1.
The conclusions do not underline the limits of the research. We consider that the author can show the limitations of the analysis carried out in his paper.
What does the paper emphasize?. What is the message of the study?.
Author Response
Dear Reviewer,
Thank you very much for the great feedback on our paper. It was very helpful and constructive. We have addressed all your inputs and provided detailed responses below. The paper has improved substantially due to your input. Note that overall, we have sharpened and polished the paper considerably. We look forward to receiving your feedback on this revised version of the paper.
Point 1: In the introduction it must be stated the added value that the paper brings to the existing academic literature.
The research hypothesis was correctly formulated, stating that state-owned banks have an impact on the stability of public finances in Ukraine in terms of cash flows between state-owned banks and public funds. Appropriate research methods were used, including an in-depth literature review, data analysis (individual and sectoral), correlation tools. The research methods are not statistically advanced, but correctly selected for the scope of analysis.
Response 1: We appreciate your valuable input. The supplementary worth of the item is acknowledged within the text spanning from lines 68 to 71.
Point 2: What is the main contribution of this study?.
Response 2: We would like to thank you for commenting. State-owned banks disrupt the stability of public finances, create additional debt dependency for Ukraine, impose an additional burden on public finances, and lead to structural changes that reduce funding for social spending. As a result, Ukrainian taxpayers are financing the inefficient activities of state-owned banks while experiencing reduced investment in education, healthcare, social protection, environmental protection, and other essential areas. (lines 24 - 29)
Point 3: We recommend indicating the references for figure 1.
Response 3: We express gratitude for your input. A reference has been included for Figure 1 at line 235.
Point 4: The conclusions do not underline the limits of the research. We consider that the author can show the limitations of the analysis carried out in his paper.
Response 4: Your input is appreciated. The confines of the study are delineated in the text at lines 673 and 694.
Point 5: What does the paper emphasize?. What is the message of the study?.
Response 5: State-owned banks disrupt the stability of public finances, create additional debt dependency for Ukraine, impose an additional burden on public finances, and lead to structural changes that reduce funding for social spending. As a result, Ukrainian taxpayers are financing the inefficient activities of state-owned banks while experiencing reduced investment in education, healthcare, social protection, environmental protection, and other essential areas. (lines 24 - 29)
Thank you for your time and consideration.
Reviewer 4 Report
Analysis of the impact of state-owned banks on the sustainability of the public finances
This paper has the declared objective of investigating whether state-owned banks from Ukraine exerted an influence during 2009-2022 over the sustainability of the public finances. The topic could be of interest from a research point of view.
The hypothesis of the paper is clearly formulated and the review of the literature is a good starting point.
The methodology used implies comparing the cash-flows: from the budget to state-owned banks and the reverse cash-flows. As the methodology is not referenced, I assume it is proposed by the authors.
However, I find the chosen methodology quite problematic for several reasons: I) it cannot describe all the channels between the owner, respectively the state and state-owned banks. For instance, if state-owned banks are profitable and accumulate capital which is not distributed under the form of dividends, it is not reflected positively; ii) it does not account that the flows of funds belong of different time periods - time value of money; iii) it is quite simplistic and lacks rigor. In my view the chosen methodology cannot lead to a thorough analysis of the impact of state-owned banks on the sustainability of the public finances.
Also, the conclusions of the paper are unclear based on the current methodology.
The paper needs to find a more adequate methodology for the chosen objective.
English language is fine.
Author Response
Dear Reviewer,
Thank you very much for the great feedback on our paper. It was very helpful and constructive. We have addressed all your inputs and provided detailed responses below. The paper has improved substantially due to your input. Note that overall, we have sharpened and polished the paper considerably. We look forward to receiving your feedback on this revised version of the paper.
Point: As the methodology is not referenced, I assume it is proposed by the authors.
However, I find the chosen methodology quite problematic for several reasons: I) it cannot describe all the channels between the owner, respectively the state and state-owned banks. For instance, if state-owned banks are profitable and accumulate capital which is not distributed under the form of dividends, it is not reflected positively; ii) it does not account that the flows of funds belong of different time periods - time value of money; iii) it is quite simplistic and lacks rigor. In my view the chosen methodology cannot lead to a thorough analysis of the impact of state-owned banks on the sustainability of the public finances.
Also, the conclusions of the paper are unclear based on the current methodology.
The paper needs to find a more adequate methodology for the chosen objective.
Response: Thank you for your valuable input. The authors present a proposed methodology in this study. It is important to recognise that the assessment of the impact of state-owned banks on public finances is based solely on accessible, publicly available data. Unfortunately, non-public data, such as commissions and transaction fees, cannot be included in this assessment. The primary objective of our empirical research was to include all available open data.
There are two key considerations:
- The methodology focuses on the estimation of cash flows as manifested in dividends and taxes.
- In order to increase the impartiality of the cash flow estimation, it was decided to use data in USD. This choice is due to the significant inflation rate in Ukraine, which makes it impractical to compare cash flows over different time periods. For example, consider the following inflation rates 2009 - 15.9%, 2010 - 9.37%, 2014 - 12.1%, 2015 - 48.7%, 2016 - 13.9%, 2017 - 14.4%, 2018 - 10.95%, 2019 - 7.9%, 2021 - 9.4%, 2022 - 20.2%. (Source: https://www.statista.com/statistics/296164/ukraine-inflation-rate/). The Ukrainian economic context shows a pronounced tendency towards dollarisation, and the dollar exchange rate is adjusted for inflation. Moreover, the use of USD data is in line with international research standards.
It is important to recognise that while the methodology chosen does not provide a comprehensive analysis of the impact of state-owned banks on fiscal sustainability, it is the only feasible approach in the current circumstances. This is particularly true when considering the publicly available data provided by the Government of Ukraine and the National Bank of Ukraine.
Thank you for your time and consideration.
Round 2
Reviewer 4 Report
The authors efforts to address the comments of the referees and to improve the overall quality of the paper are appreciated.
However, I consider that the current version of the paper is not substantially different compared to the previous one.
Thus, the methodology used is quite simplistic, basically it consists of calculating differences. Moreover, it cannot depict all the aspects of the studied relationship. For instance, if the state injects capital in a bank in 2010, that bank records significant profits in the next 10 years but does not distribute dividends, the result will be negative. In addition, the different moments of time for the cash flows it is not accounted for. Some discount factors should be used, even if the authors use nominal values expressed in USD.
I continue to recommend a further refinement in the methodology used.
Author Response
We very much appreciate your thoughtful insights and comments on our methodology. Your perspective highlights valid concerns about the simplicity of our current approach, which relies primarily on the calculation of differences. We recognise that this approach may not capture the full range of complex relationships under investigation.
The basic components of our research approach include the assessment of cash flows, with a particular focus on individual cash flow data, which is publicly available to a limited extent. However, we have deliberately excluded non-cash flows from our considerations, an aspect that is also outlined in section 3.
With regard to the choice of currency for our study, please refer to our commentary on this matter. Over the period from 2009 to 2022, the Ukrainian hryvnia will depreciate significantly, by 4.82 times its initial value. This calculation is the result of multiplying the inflation rates from 2009 to 2022, namely 1.159 * 1.0937 * 1.0796 * 1.0056 * 0.9974 * 1.121 * 1.4868 * 1.1391 * 1.1444 * 1.1095 * 1.0789 * 1.0274 * 1.0936 * 1.2018 (source: https://www.statista.com/statistics/296164/ukraine-inflation-rate/). This significant currency fluctuation hinders effective comparisons between cash flows, such as capitalisation costs in 2009 and dividends in 2022.
Further analysis reveals a high correlation coefficient of 0.93 between the inflation rate and the exchange rate, indicating a strong and direct relationship. The Ukrainian economic landscape is characterised by a high degree of dollarisation, which further strengthens the case for using the USD as the currency of choice. This choice not only facilitates understanding and acceptance by international researchers but also resonates with researchers within Ukraine and government officials due to its global familiarity.
Round 3
Reviewer 4 Report
The current version of the paper is not substantially different compared to the previous one.
The authors acknowledged the simplicity and limitations of the methodology, but choose to maintain the empirical analysis largely unchanged. My previous concerns are largely unaddressed.
Regarding the choice of the currency, I consider that, given the depreciation of the local currency makes perfect sense to express the amounts in USD. My suggestion was to consider the time value of money for USD in this case (using the USD interest rate).
In my view, a more refined and complex methodology is needed in order to meet the objectives of the paper.
