A trigger to the financial sector reform was the signing of the Association Agreement with the European Union. The key document of the financial sector reform is the Comprehensive Program of the Ukrainian Financial Sector Development until 2020, which was approved in June 2015 and updated in January 2017. The program is based on the following fundamental principles:
• European integration;
• Liberalization of financial markets and gaining a regime of the internal market with the EU in the field of financial services;
• Balance of economic interests through the establishment of a competitive market environment;
• Independence and efficiency of regulators’ operation, supervision based on risk assessment;
• Transparency and high standards of information disclosure by financial sector participants and regulators;
• Responsibility and trust between financial sector participants and regulators;
• The integrity of the financial system, the comprehensive protection of the rights of creditors, consumers and investors.
The adoption of the program has given a real start to the banking system reform, which must revitalize the economy and create a competitive environment under EU standards, restore the confidence of Ukrainians in national banks, renew lending, make non-cash payments attractive, affordable and secure.
The program includes measures in the following areas: financial stability and sustainable development, financial sector infrastructure, consumers and creditors protection, and institutional capacity of regulators. A comprehensive program plan contains a list of specific items regarding measures, actions, start and completion dates, responsible persons and institutions.
The program will be implemented in three stages:
I. Purification of the financial sector: the cardinal solution to the problem of “ballasts” of the past, withdrawal of unscrupulous players from the market, the disclosure of shareholders of financial sector participants.
II. Reloading of the financial sector: ensuring transparency and equity in the “shareholder – management – client” chain, removing all administrative constraints caused by the crisis, increasing the capitalization of financial sector participants, strengthening of the rights protection of borrowers, lenders, and investors.
III. Creation of prerequisites for long-term sustainable development of the financial sector: ensuring the sustainability and reliability of the financial sector in the long-term, approximating the standards of solvency regulation and liquidity of banks to the recommendations of the Basel Committee, introduction of accumulative pension provision, stimulation of the market of insurance and other financial services and development of infrastructure and financial sector instruments, creation of additional guarantees of financial reliability in case of economic recession, increasing the reliability of systemically important banks, increasing institutional capacity of regulators.
The IMF carefully assesses the course of financial sector reform. In the last memorandum (March 2017) a significant part of the activities is devoted precisely to this aspect. It should be noted that measures for the 1st stage have already been implemented and the realization of the 2nd stage is under way. The banking market got rid of “ballasts.” For 2014-2016, the number of banks in Ukraine decreased from 180 to 100. In 2016, more than 20 banks, mostly small, were recognized as insolvent, while in 2015, 33 financial institutions left the market.
With the closure of insolvent institutions in the country, the consolidation of the banking system kept going. If in 2013 top 10 banks accounted for 54% of assets, in 2016 – already 72%. Following the results of the first quarter, after the consolidation and nationalization of “PrivatBank,” the share of state-owned banks exceeded 50%. Such a situation is abnormal, but the government plans to sell at least 20% of “Oschadbank” and “Ukreximbank” shares to international financial institutions (for example, the EBRD) by the middle of 2018.
The Ministry of Finance of Ukraine was created in 1991 and is the successor of the Ministry of Finance of the Ukrainian SSR. The regulation on the Ministry of Finance was approved by the presidential decree in April 2011.
The National Bank of Ukraine. The Central Bank of the State was created based on the Ukrainian Republican Branch of the State Bank of the USSR. The legal basis was the law “On Banks and Banking,” adopted by the Verkhovna Rada in March 1991.
The National Commission for Regulation of Financial Services Markets (NCFS) was established by a presidential decree in November 2011, in compliance with the law “On Financial Services and State Regulation of Financial Services Markets” instead of the liquidated State Commission for Regulation of Financial Services Markets of Ukraine.
National Securities and Stock Market Commission (NSSMC) was established in June 1995. In November 2011, it was reorganized based on the State Commission on Securities and Stock Market.
Deposit Guarantee Fund (DGF). The institution carries out special functions in the field of guaranteeing deposits of individuals and the withdrawal of insolvent banks from the market. DGF was created within the framework of the Presidential Decree of September 10, 1998. The functions of the Fund were sharply expanded in 2012 with the adoption of the Law “On the system of guaranteeing deposits of individuals.” That’s when the DGF became responsible for managing the insolvent banks.
The current situation
The reform of the financial sector is one of the most significant reforms (62 in total), its implementation is described in the Strategy for Sustainable Development “Ukraine-2020”. Based on the current realities, the primary task of reforming the financial system is to restore confidence in the banking system, lending setup, strengthen the rights protection of financial services consumer, etc.
The next steps towards the financial sector reform will be a gradual, but steady fulfillment of obligations under the IMF memorandum. The passing of submitted bills in parliament is still a sticking-point of the reform.
In January of this year, the NBU has updated the Comprehensive Program of Ukraine Financial Sector Development by 2020. The main changes can be divided into three directions: new measures and actions were added in response to the challenges arising in the financial market, the detailed and consolidated measures of the program, as well as the revised timing of the implementation of certain measures. Сhanging of program implementation period was also caused by a delay in the adoption of bills. Among the least successful projects are the creditor rights provisions, the resolution of bad debts and the implementation of the project on NCFS functions redistribution.
In 2017, the National Bank should present a strategy for development and a road map for harmonization of banking regulation with the recommendations of the Basel Committee and EU directives; complete the development of a new bank liquidity standard following the Basel III recommendation. And in the future, the development of the capital market should be ensured by the adoption of the law on derivative financial instruments and regulated markets, approval of the law on the consolidation of the functions of state regulation of financial services markets, the creation of a new currency legislation with the ongoing course for currency liberalization, ensuring an efficient financial restructuring process.
Along with the reforms aimed at banking sector problem-solving, it is imperative to bring to the world standards the pensions and insurance systems. The balance sheets of insurance companies require “purging” of toxic assets no less than banking. It is necessary to legislatively ensure the creation of a transparent market for insurance services. The draft revision of the law on insurance proposed by the people’s deputies from February 2015 is under consideration by the Verkhovna Rada, and in March 2016, the first reading took place. A transfer of regulatory functions from the NCFS сan have a negative impact on the insurance reform. The question of how the market will respond and whether its own regulatory and oversight procedures will be improved remains open.
The problem of reforming non-state pension funds is also very important. It is necessary to provide conditions for the development of non-state pension provision through the introduction of incentives for legal entities and individuals, and the introduction of European standards of governance, transparency and reliability in non-state pension funds.
The European Union. Conditions for granting macro financial assistance in the amount of EUR 1.8 billion (signed in May 2015) in the part of financial sector reform, envisaged the adoption of a regulation on the recognition of individuals and legal entities associated with banks on the basis of determined features (approved in May 2015) and the creation of a central credit register at the NBU (in process).
International Monetary Fund. Ukraine’s commitments to the IMF (according to the latest memorandum) include the following:
1. Events involving the “PrivatBank”. The focus area is the restructuring of the bank’s debts. For this purpose, PrivatBank signed an agreement with a consortium of international companies headed by Rothschild & Co to negotiate a restructuring of loans of former bank owners. The next step should be an approval by the bank’s supervisory board of the restructuring strategy of the loans mentioned above, which is scheduled to be completed by the end of June 2017. The restructuring will provide for raising a level of provision or collection of “PrivatBank” bad loans. Full completion of the audit and drawing conclusions on possible offenses in the bank before its nationalization is scheduled for the end of September 2017.
2. General banking supervision. Further actions are planned to monitor banks activities, which primarily include the submission of restructuring plans or the assessment of the level of their recapitalization. Also, efforts will be made to strengthen all the banks remaining in the banking system. The diagnostic studies of remaining banks will be completed by the end of September 2017. And by mid-July 2017, all banks will have a minimum authorized capital of UAH 200 million. Banks which cannot meet this requirement will be removed from the market. It will also be provided a strict compliance by all banks with the goals of reducing and limiting the volume of transactions with related parties. It is planned to establish a list of measures necessary for the implementation of the basic Basel principles, by which a plan of action will be prepared up to the end of 2019.
3. Proceeding with the establishment of a credit register in the NBU. To this end, the Verkhovna Rada should provide the NBU with powers to obtain information from banks by the end of September 2017 and, by the end of December 2018, start to provide information to improve the efficiency of lending.
4. The work of state-owned banks. The implementation of the reform strategy for the state banking sector will be continued (approved in February 2016). The bill will be submitted to the Parliament, promoting adoption of a new approach to corporate governance of state banks. A memorandum of understanding will be prepared by the end of June, determining the structure of relations between the Cabinet of Ministers and state banks. The supervisory board of each bank will be selected in accordance with the above-mentioned strategy.
5. Work of the DGF. A bill will be submitted to the Verkhovna Rada, which will strengthen the ability of the DGF to work with assets. By the end of June, it was planned to sell assets at the amount of at least UAH 10 billion on international platforms.
6. Consolidation of the regime for corporate debts restructuring and protecting the rights of creditors. By the end of September, it is expected that the Verkhovna Rada will adopt amendments to the law “On restoring the debtor’s solvency or recognizing it as a bankrupt” to facilitate the restructuring process and increase the effectiveness of the liquidation process, and the law, which strengthens the legislative provisions on the automation of collection and enforcement of debt. It is also planned to make changes that will allow to write off bad debts without initiating or completing the procedure.
7. Creation of a legal framework for the functioning of the financial market. It is planned to introduce bills, which will increase the powers, independence and institutional capacity of the NSSMС. The National Commission also must reform its internal structure and procedures. The responsibilities for supervision of a range of financial intermediaries will be transferred from the NCFS (to be liquidated by the end of 2017) to the NBU and the NSSMC. The NBU will be responsible for the regulation and supervision of insurance and leasing companies, credit unions, and credit bureaus and other non-bank lenders, pawn shops, etc.; and the NSSMC will be responsible for regulating and supervising private pension funds, issuers of mortgage certificates, construction financing funds and real estate funds. A new law on auditing and a revised accounting law, developed based on EU standards will also be approved (by the end of July 2017).
The implementation of financial sector reform is closely monitored by independent experts from various organizations, among them are the following:
Center for Economic Strategy – ces.org.ua
Independent analytical platform VoxUkraine – voxukraine.org
Non-profit organization EasyBusiness – easybusiness.in.ua
Institute for Economic Research and Policy Consulting – ier.com.ua
Ukrainian Federation of Insurance – ufu.org.ua
In January 2015, the National Bank of Ukraine established the Financial Stability Board, the first meeting of which took place on January 12, 2015. At the same time, President Poroshenko signed a decree on the creation of the same-name body within the National Bank only in March 2016. The Financial Stability Board is an interdepartmental body. It is composed of the head of the National Bank of Ukraine, the Minister of Finance, the chairman of the NSSMC, the chairman of the NCFS, DGF managing director, one of the deputy chairmen of the NBU and the Deputy Minister of Finance. The Board decisions are recommendatory, and its task is to minimize the risks that threaten the stability of the banking and financial system of Ukraine.
Dissolution of “ballasts” (in accordance with the implementation of Phase I of the Comprehensive Program of the Ukrainian Financial Sector Development until 2020) has not proceeded the way it was expected. Banks began to resume their activities through the courts. As of May 1, 2017, the courts decided to restore the activities of 12 financial institutions. According to NBU estimates, all these actions reduce the efforts aimed at improving the Ukrainian banking system.
January 2015 – The Strategy for Sustainable Development “Ukraine-2020” was adopted.
January 2015 – The Law “On Amendments to the Law of Ukraine” On Financial Services and State Regulation of Financial Services Markets “on the Disclosure of Information” was adopted.
March 2015 – The Law “On Amendments to Certain Legislative Acts of Ukraine on Responsibility of Persons related to a Bank” was adopted.
May 2015 – The Resolution of the NBU “On Approval of the Regulation on the Identification of Persons related to the Bank” was adopted.
June 2015 – The Comprehensive Program of Ukrainian Financial Sector Development until 2020 was approved.
June 2015 – The Law “On Amendments to Certain Legislative Acts of Ukraine on the Development of the Institutional Capacity of the National Bank of Ukraine” was adopted.
June 2015 – The Law “On Financial Restructuring” was approved.
March 2017 – a memorandum was signed with the IMF, where one of the commitments of Ukraine is the further implementation of the financial sector reform.
April 2017 – The Government approved the medium-term Plan of Priority Actions for the Government until 2020.
Illustration by Dmytro Zinchuk