Ukraine: new recapitalisation procedure for banks

On 4 November 2008, the Cabinet of Ministers approved a procedure for state participation in recapitalising the country’s banks.

This follows legislation in October to help Ukraine’s economy in the wake of the global financial crisis, under which the National Bank of Ukraine was authorised to select banks needing state support.

The capitalisation procedure provides a mechanism for the state to take a majority stake in a distressed commercial bank in return for funding an increase in its charter capital. It is designed to ensure stability of the banking system but may also lead to conflict if the government seeks to dictate the banks strategy without regard to the position of management or the other shareholders.

The key requirements of the capitalisation procedure are:

• Any capitalisation proposal would have to come from the NBU, require the support of the Ministry of Finance and be approved by the Cabinet of Ministers
• Any capitalisation proposal would also need to be approved by the bank’s shareholders (or participants) or its temporary administrator
• Banks would need to be (or turn themselves into) open joint stock companies in order to be eligible for state recapitalisation
• The value of the bank’s shares, after taking account of its losses and any recapitalisation expenses, may not exceed their nominal value (based on independent expert valuation)
• The minimum equity stake the state would obtain is 50% + 1 share
• The public procurement rules would not apply to any state acquisition of bank shares
• Recapitalisation funding can be drawn from the state budget, the stabilisation fund or domestic state bonds
• Where bank shares are acquired in return for domestic state bonds, the NBU must buy them back at their nominal value and at coupon value equal to its discount rate until their maturity
• The banks must disclose to the NBU the identity of anyone with a 5% or larger holding of charter capital
• Authorised representatives of the Ministry of Finance are entitled to access any information on the bank’s financial standing, including information covered by banking secrecy

To protect the state’s interests and maximise any profit from a subsequent sale of its shares, the Ministry of Finance will insist that the banks undertake a performance improvement programme, and may agree with the other shareholders about co-sale of their shares. Once the financial situation has stabilised and the bank’s performance has improved, the state’s stake will be sold by open auction.

Law: Resolution of the CMU No. 960 (4 November 2008) on the procedure for participation of the state in the banks’ capitalisation. Effective since 8 November 2008

Law “On Urgent Measures for Avoidance of World Financial Crisis’ Negative Impact on Economy of Ukraine and Amending of Some Legislative Acts of Ukraine” (31 October 2008)