“This year we have implemented several projects, which the Deposit Guarantee Fund can be rightly proud of” says Yulia Kyrpa, Partner at Aequo Law Firm
— Over the last eighteen months more than 50 Ukrainian banks were declared insolvent. What could cause that?
— The list of grounds, on which the National Bank of Ukraine may adopt a decision on declaring a bank insolvent, is rather long and is still growing. Thus, at the end of 2014 the Verkhovna Rada of Ukraine adopted the Law of Ukraine “On Measures Aimed at Promoting Capitalization and Restructuring of Banks”. This Law allowed the NBU to declare a bank insolvent should the shareholders fail to carry out prompt recapitalization of a bank or to meet the deadline for submission of the recapitalization program or reorganization plan. Non-disclosure of the bank’s ownership structure and non-compliance of this structure with the legal requirements were added to the list of grounds over the period from May this year onwards.
In addition, the NBU is entitled to declare a bank insolvent when a bank undertakes risky activity and systematically fails to fulfill its obligations to the depositors or other bank creditors.
— What awaits bankrupt banks?
— They should be withdrawn from the market. The amended Law of Ukraine “On Households Deposit Guarantee System” provides several possible scenarios within insolvency proceedings, including liquidation of an insolvent bank followed by the making of guaranteed payouts to its depositors, sale of an insolvent bank to a new investor, creation of a transition bank, restructuring through merger to the solvent bank, purchase and acceptance method (similar to the Purchase & Assumption Scenario stipulated by the laws of the USA and the EU), accompanied by transfer of the insolvent bank’s government-guaranteed liabilities and offsetting of assets to the receiving bank with the further liquidation of the insolvent bank.
Under existing circumstances, the withdrawal of an insolvent bank from the market is, in the main, carried out through liquidation followed by the payment of guaranteed amounts of deposits.
— Are there any examples where other scenarios of withdrawing problem banks from the market have been successfully implemented?
— There are several projects that the Deposit Guarantee Fund (DGF) can be justifiably proud of. Our company, in particular, accompanied two such transactions in 2015. Thus, we have consulted US Private Equity Fund NCH as to the acquisition of the insolvent Astra Bank (in its entirety) from the DGF. This project was the first of its kind and was recognized for its innovation in the annual program conducted by The Financial Times’ “Innovative Lawyers” 2015, as it contributed to attracting foreign capital into the country during the crisis period and increased the credibility of Ukraine duly represented by the DGF as the seller of insolvent banking institutions.
In addition, we have consulted a Ukrainian investor on the acquisition of a transition bank, established on the basis of the insolvent Omega Bank PJSC, which assumed assets and liabilities transferred by the insolvent bank prior to its liquidation. This project was also the first of its kind.
Among other projects, it is worth noting the establishment of the PJSC Kristal, a transition bank created on the basis of the insolvent Terra Bank, the acquisition of Ukrgasbank (in its entirety) by the international trading company Primestar Energy FZE, and successfully implemented by the DGF and very popular in the USA and the EU scenario of purchase and assumption of all the liabilities and offsetting assets of Promeconombank (Donetsk) by Fidobank (Kyiv).
— What was innovative about the project on the acquisition of Astra Bank?
— This project set multiple challenges of the highest order as well as small unorthodox issues arising on a daily basis. It was the first purchase in Ukraine of an insolvent bank (as a whole financial institution) since the beginning of the last financial crisis, and the overall transaction was implemented on the basis of new and previously untested legislation. Besides, it was necessary to keep within very strict deadlines for the implementation of the interim administration so as to perform a range of procedures: qualification of the investor in the DGF, due diligence process, preparation of the proposal to participate in the competition, obtaining regulatory approvals necessary for the successful implementation of the transaction, negotiation of the share purchase agreement, and recapitalization of the bank. In this context, the coordinated work of the NBU, the DGF and the investor, alongside the permanent joint search for the appropriate solutions within the existing legal framework, played a crucial role.
Moreover, up to a certain point there was a risk of a busted transaction due to the judicial proceedings, initiated by the previous owner of the bank, on the appeal against the NBU’s decision on declaring the bank insolvent. By a happy coincidence, shortly before the share purchase agreement came into force a new version of the Law of Ukraine “On Households Deposit Guarantee System” was adopted, according to which a good-faith purchaser of an insolvent bank may keep the acquired assets (without regard for the outcome of the judicial proceedings that can be initiated by the previous owner of the bank).
— What is your assessment of the recent changes in the Law of Ukraine “On Households Deposit Guarantee System”?
— In my opinion, the new version of the law of Ukraine “On Households Deposit Guarantee System” is a great step forward. Some of these changes were proposed by our team in within the EBRD project on reforming deposit guarantee system of Ukraine and reflect best practices that exist in this sphere in the West.
More specifically, in addition to a good-faith investor’s protection from possible disputes concerning assets initiated by the previous owner of the bank, we consider as progressive the provisions allowing investors to participate in tenders for the purchase of banks/assets of banks. The DGF’s activities are bound to feel a positive impact caused by the changes extending rights of the Fund’s authorized representatives to have access to all the information about banks until they are declared insolvent by the NBU. It is also worth mentioning quite a new scenario for Ukraine (but popular in the USA) on the withdrawal of insolvent banks from the market involving transfer of the insolvent bank’s liabilities to the receiving bank (with further financial support to be provided for the receiving bank by the DGF).
— What further steps to reform the deposits guarantee system do you consider reasonable?
— It is necessary to somewhat liberalize the currency law permitting foreign investors to purchase toxic loans as well as to improve procedures and clarify the DGF’s powers on restructuring loans issued by the banks. There is a need to develop some appropriate regulations in order to implement in practice the legally established procedure on the granting of AMCU permissions on concentration to the investor and the NBU’s approval for participation within two days from the date when the investor was given a qualifying status by the DGF.
— What should be done to stabilize the situation in the Ukrainian banking sector?
— First of all, it is necessary to focus on “preventive measures”, which can enable destabilization of the banking sector in the future to be avoided. The NBU should continue its work on disclosure of beneficial owners of banks, further volume reduction of lending to the individuals associated with banks or their shareholders, development of a more effective system of supervision over banks both in the period of their normal banking activity and through difficult periods, and empowering curators of the banks, appointed by the NBU. Special attention should be paid to closer monitoring of transactions performed by a bank immediately prior to declaration of its insolvency. In particular, it is necessary to limit the possibility of withdrawal of liquid bank assets during this period and to prevent artificial splitting of deposits. Hopefully, the lessons of 2014-2015 will not go in vain and will be taken into consideration by regulators of the banking sector in future. An English proverb says in this regard: “When you lose, don’t lose the lesson”.