Credit Crunch Challenges for the Ukrainian Banking System
Ukrainian Law Firms 2009
With even mighty Swiss banks requesting government support in the autumn of 2008, it comes as no big surprise that the Ukrainian banking system is suddenly looking fragile.
The Ukrainian economy is now collapsing, not because of toxic mortgage loans as is the case in the United States, but rather because of the credit crunch’s impact on capital markets. With the increased role of export-oriented production in the country’s economic growth, Ukraine became vulnerable to world demand for metal and other “traditional” Ukrainian commodities, especially for steel.
Investors expect the Ukrainian government authorities to take the steps similar to those actions made by governments of the USA, the UK, Germany, Russia and other countries to support some of the troubled financial institutions. Certainly, everyone is looking at the Ukrainian authorities right now, wondering whether they will be able to agree upon and implement a plan that will minimize the consequences of the global financial crisis for the Ukrainian economy.
The Anti-Crisis Act
The core legislative act that is aimed at preventing the spread of the negative impacts of the financial crisis in Ukraine is the On Immediate Measures against Negative Consequences of the Financial Crisis and On Amending Certain Legislative Acts of Ukraine No.639-VI (hereinafter - the Anti-Crisis Act) adopted by the Ukrainian Parliament on 31 October 2008. In spite of the fact that the main purpose of the law is to mitigate the risks of the credit crunch’s impact on the Ukrainian economy, the Anti-Crisis Act also has provisions to ensure the implementation of not only pre-emptive steps, but of rescue actions in respect of Ukrainian banking institutions and agricultural companies.
The Anti-Crisis Act provides for the complex of measures that are aimed at enhancing financial and budgetary discipline, protection of the banks’ customers and improving the current account balance. In the first place, the stabilization fund was established for the purpose of refinancing loans received before 15 September 2008 by Ukrainian banking institutions and industrial companies, financing or co-financing of long-term national infrastructure and investment projects, providing financial aid to banking institutions (including the rise in charter capital) etc. The fund will consist of extra proceeds from privatization in 2008 (which are unlikely to appear) and all proceeds from the privatization in 2009 as well as proceeds from placement of special purpose state securities.
The provisions of the second and third articles of the Anti-Crisis Act specify a special urgent procedure of bank recapitalization in Ukraine. In fact, these provisions noticeably simplify the procedure of the shareholders’ change within the Ukrainian banks. It is in the Cabinet of Ministers of Ukraine’s (hereinafter — the CMU) authority to make a decision on participation of the state in recapitalization of the banks upon proposal of the National Bank of Ukraine (hereinafter — the NBU). The NBU is authorized to define the criteria for the state’s participation in recapitalization of the banks, to carry out diagnostic inspection of the banks and to recommend an increase in a bank’s shareholders capital with participation of a new investor(s), appointing of temporary administration or proposing that the Ukrainian government participate in a bank’s recapitalization. The problem is that there is still no clear understanding of the mentioned criteria to be used by the NBU and an approved methodology for the diagnostic inspection is not available.
The Ministry of Finance of Ukraine shall in its turn manage state-owned shares in respective banks and advise the CMU on the appropriate time to sell state shares to gain more profit when favorable market conditions come. Similarly, the Anti-Crisis Act does not stipulate any mechanism and procedure for the distribution of stabilization funds.
Additionally, the Anti-Crisis Act provides for simplified registration procedures for recapitalization of banks with the State Commission on Securities and Stock Market, the NBU and state registrars. Moreover, the Act established a special one-month time limitation to challenge the respective decisions of the meetings of the bank’s shareholders in Ukrainian courts. On the whole, the adoption and further appropriate implementation of the Anti-Crisis Act is of vital importance to the Ukrainian economy as it provides the Ukrainian authorities with sufficient tools to efficiently and promptly control the banking system at a time of financial crisis and to stabilize the economic situation in Ukraine. The Anti-Crisis Act raises only those traditional Ukrainian concerns connected with the use by the state authorities of the new tools and probable abuse of their new substantial powers in the course of a bank’s sale to new investors.
At the same time, the CMU Resolution No.960 On Approval of the Procedure of State Participation in Capitalization of Banks adopted on 4 November 2008 provides more detailed description of the mechanisms of state intervention in the activities of Ukrainian banks. It drastically simplifies the procedures and shortens the time period for settlement of all technicalities that are required for recapitalization of banks (e.g. no legal opinion by the Justice Ministry of the CMU draft decree on bank intervention is required). However, only the practical implementation of the resolution will demonstrate its effectiveness and procedural smoothness.
The NBU Resolutions
On 11 October 2008 the NBU passed the Resolution On Additional Measures concerning Bank Activities No.319 that established the number of limitations on banking activity with the purpose of neutralize any negative external economic impact of the financial crisis and to stabilize the Ukrainian banking system.
According to Resolution No.319 with the aim of maintaining banking liquidity, the NBU may provide loan facilities to banks with a maturity of up to one year, with a minimum interest rate of 15% per annum, in the amount of up to 60% of the banks’ regulatory capital, but not exceeding 90% of the collateral value provided by banks with a list of collateral to be agreed with the NBU. The list of assets for such collateral has been extended and it is now not being considered as a complete list.
Further, Resolution No.319 provides for performance by the banks of their obligations under any contracts on raising capital (regardless of a category of the bank’s counterparty) only upon expiry of the term of the bank’s payment obligation. Accordingly, this rule is interpreted as a prohibition of pre-term withdrawal of deposits from banks, which in such case directly contradicts the provisions of Article 1060 of the Civil Code of Ukraine with respect to the right of individuals to withdraw any types of their deposits at their first demand. Thus, the chances of making banks return deposited funds through court proceedings are rather good.
The NBU has also unified foreign currency official and cash market exchange rates by means of capping the difference between the UAH sale rate and the official NBU rate to a maximum of 1.5%.
Analogously, the purchase price of cash foreign currency may be established by banks as not exceeding 3% of the sale price of cash foreign currency. Moreover, Resolution No.319 obliged banks to carry out foreign currency cash trade from 1 January 2008 exclusively through their own cash desks.
We would like also to note that Resolution No.319 provided for this to take effect on 13 October 2008. However, in accordance with provisions of Article 56 of On the National Bank of Ukraine Act of Ukraine, all normative acts of the NBU are subject to obligatory registration with the Justice Ministry. There is no official information about such registration of Resolution No.319 and, subsequently, this unclear situation with validity of the Resolution No.319 alongside with the questionable legality of certain provisions thereof leave much space for any court disputes with respect to the limitations established by Resolution No.319.
To make the life of Ukrainian borrowers and negotiations with their foreign lenders easier, on 25 September 2008 the NBU passed Resolution No.294, On Amendments to the Resolution No.363 of the Board of the National Bank of Ukraine of 3 August 2004, that cancelled the maximum interest rate limitations for medium-term and long-term loans and at the same time increased the maximum interest rate for loans with a maturity of up to 1 year, that were established by the Resolution No.363 On the Establishment of the Maximum Interest Rates for Foreign Borrowings of Residents of 3 August 2004. Thus, at the moment there is no established maximum interest rate for foreign borrowings of residents with a maturity of over 1 year and the maximum interest rate at 11% per annum is established for foreign borrowings of residents in foreign currency of the 1st group of the Classifier of Foreign Currency (which includes the most widespread currencies - USD and EUR) with maturity of up to 1 year.
Conclusion and Forecast
The time has now come when the government authorities of Western countries no longer trust self-regulation in the financial sector, and it is apparent that change is now inevitable for the entire financial sector. In view of significant penetration of foreign capital in the Ukrainian banking system this change will necessarily influence the Ukrainian banking sector.
The Ukrainian banking system will definitely face greater regulation by the NBU and a significant reshaping is expected as a number of banks will change ownership. While not as severe, nor directly connected to the global credit crisis, borrowing in Ukraine is indeed getting tighter and more expensive. In contrast to the cheap, easy and plentiful lending practices of recent years it seems that the times of aggressive borrowing from abroad are over for Ukrainian banks.
What is also clear is that such turmoil is likely to create specific challenges for the legal practice of servicing banking clients. The banking world is definitely going to look very different and law firms dealing with banking and finance issues will have to focus on this. Banks are likely to become larger and banking activity to become more heavily-regulated, which may lead to a boom in regulatory work for lawyers in such crisis times when the NBU is very active in its regulatory activity.
is a Partner with Volkov Koziakov & Partners law firm