Nationalisation of systemically important banks: What the market should expect

The Verkhovna Rada has passed a law regarding the nationalisation of systemically important banks whose shareholders have been included in sanction lists. The authors of the law believe that this document will help improve the legal regulation of the banking. If sanctions are imposed on shareholders, they will not have the opportunity to timely recapitalise the bank if needed.

VB PARTNER lawyer Olena Gavrilova told Mind when the National Bank of Ukraine (NBU) is obliged to make a decision on declaring a bank insolvent and what tools it would have to solve the problem.

Which banks are at risk?

If sanctions are imposed on a bank or its shareholder, the NBU is obliged to decide to declare the bank insolvent and transfer its management to the DGF (Deposit Guarantee Fund).

Previously, it was planned that the NBU would declare any bank insolvent through sanctions. However, after active discussions, the Parliament limited the sanctions to systemically important banks.

Therefore, potentially, the law applies to 15 banks that the NBU has identified as systemically important in 2023.

However, Sense Bank may not be the only one. The National Agency on Corruption Prevention (NACP) has recently added two systemically important international banks, OTP Bank and Raiffeisen Bank, to the list of sponsors of terrorism.

If sanctions are applied to the owners of these banks, the procedure will automatically be triggered for them as well.

What instruments does the NBU have?

The law outlines two mechanisms:

1. The NBU makes a decision to declare a bank insolvent and sends a proposal to the Cabinet of Ministers of Ukraine (CMU) to buy out the bank's shares, effectively nationalising the bank.
2. The CMU has the right to refuse the state's participation in the capital. In this case, the process of market withdrawal begins through the regular procedure of liquidation.

Regardless of the method of implementation, DGF introduces temporary administration and assumes control over the bank. The authorities of all bank managers are terminated.

Subsequently, the DGF provides the Ministry of Finance with a list of candidates for the bank's management positions. The candidates are agreed upon with the NBU. The renewed composition of the Supervisory Board and Management Board of the bank begins functioning after the temporary administration period ends.

It is important to note that these changes are applied exclusively during the state of war.

The test of war

During the second day of russia's invasion, the banking licence of International Reserve Bank JSC (formerly Sberbank) was revoked. The reason was clear – the bank was fully under the control of the aggressor state.

Subsequently, the NBU made a decision to declare four more banks insolvent. They are:

• Megabank

However, its liquidation was not related to the war. The bank was already identified as problematic prior to the full-scale invasion, and it failed to address the issues raised.

• Forward Bank

The situation is similar to the previous example. The NBU initially identified the bank as problematic, but its solvency continued to deteriorate, leading the regulator to declare it insolvent.

• Sich Bank

The bank was unable to pay interest and repay the refinancing credit from the NBU.

• IBox Bank

The regulator accused it of systematic violations of financial monitoring rules, particularly in the gambling industry.

Currently, all these banks are in the liquidation process.

Despite these cases, the NBU reported in its Q1 2023 review that the market is successfully weathering the crisis, maintaining high liquidity, and generating profits.