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Managing Partner, Corporate Finance & Strategy, Gryphon Group
Senior Partner, Head of Gryphon
Legal law firm
European Regulatory Vector
When Ukraine signed the Association Agreement with the European
Union in 2014, we officially chose the European vector of development. However, it is not plain sailing and requires systematic and urgent reform of the most sectors of the economy, including the banking sector, which is the basis of the country’s financial and economic stability.
Reform of the Ukrainian banking sector began in 2015 through the adoption of appropriate changes to legislation. The above-mentioned changes were aimed at increasing the transparency of the ownership structure of banks and their shareholders, increasing their solvency margin, setting the responsibility of the real owners of banks for their insolvency, as well as prohibiting trust structures and other corporate instruments that do not allow the beneficiary owners of banks to be identified.
As we can see the first stage of the banking sector reform, set by the Integrated Program for the Development of the Financial Sector of Ukraine until 2020, namely, the clearing of the financial sector, has been practically completed.
So it’s time for the next two stages:
— reloading the financial sector — the abolition of all monetary and currency restrictions due to the crisis, increasing the capitalization of banks;
— creating the preconditions for the sustainable development of the financial sector in the long run and the approach of banks solvency and liquidity standards to recommendations made by the Basel Committee on Banking Supervision.
To date, the recommendations of the Basel Committee on Banking Supervision have been actively implemented in Ukraine. The ideologist of their application in Ukraine is the NBU, which is the body whose primary responsibility is to maintain the stability of the country’s banking system.
The recommendations of the Basel Committee on Banking Supervision are not binding, and belong to so-called “soft law”. However, for the vast majority of the parts of the world, they are as a law, since they are developed and approved by central banks and financial institutions of the most economically developed countries of the world, on which the global financial stability depends.
New Principles of the Banks’ Activity Regulation
Thus, the NBU has set the course for the implementation of the recommendations of the Basel Committee on Banking Supervision and the Directive (EU) 2013/36 / EC of the European Parliament and the Council of 26 June 2013 On Access to Credit Institutions Activity and Prudential Supervision of the Credit Institutions and Investment Companies Activity.
To do this, in October 2017 our regulator developed and made public a new Concept of registration and licensing of banks (the current regulation is set out in NBU Board Resolution No. 306 of 8 September, 2011).
In accordance with the above-mentioned Concept, the following principles should be taken as the basis of the legal regulation of registration and licensing of banks:
— essential and risk-oriented approach to banking regulation;
— the necessity to substantiate the setting of monetary or currency restrictions;
— monitoring of compliance with licensing requirements;
— economic relevance of the requirements to banks, their owners and managers;
— maximum simplification of formal regulations of the law.
The concept provides that the NBU will carry out regulatory supervision of banks by analyzing the following key issues:
— a business model as a core document, which outlines the business strategy;
— a corporate and risk management systems as a basis for monitoring the effectiveness and legality of the decisions taken by bank management bodies;
— capital riskiness as the availability of sufficient assets in the bank necessary for provision of commercial activities;
— liquidity and funding as a bank’s ability to ensure the timeliness, completeness and continuity of all its pecuniary obligations.
The NBU is going to carry out banking supervision not only of formal criteria set by law but also taking into account the business model or specialization of a bank, its financial standing, development strategies, the role for consumers or the state, as well as potential risks in each particular case.
This approach is based on the principles of the SREP — Supervisory Review and Evaluation Process (first introduced in the Basel Committee on Banking Supervision document — Basel II in 2004).
The above-mentioned system will provide the opportunity for the NBU to approach the regulation in a flexible way and in a balanced manner, by reference of the economic expediency or social necessity. Of course, this approach will be successful only if the NBU does not abuse its granted discretionary powers, particularly that it does not make unreasonable decisions.
I propose to consider the key novelties of banking regulation, which will become mandatory for all Ukrainian banks in the near future.
New Qualification Requirements for Bank Management
Let’s start with the fact that the NBU is planning to develop new suitability assessment criteria for the top management of banks. Apart from impeccable business reputation, the criteria for professional suitability (theoretical knowledge and practical experience) and managerial suitability (potential conflicts of interest, ability to give sufficient working time to a bank, independence from interference for and on behalf of other parties) will be introduced and expanded.
Collective Suitability Assessment
One of the banking legislation novelties should be the introduction of a procedure for collective suitability assessment of bank management bodies, in other words, their compliance and qualifications. According to the Memorandum between Ukraine and the International Monetary Fund, the NBU shall carry out a collective suitability assessment of the management bodies of the 10 largest banks by the end of April 2018, the next 10 banks by the end of July 2018, and of the remaining banks by the end of April 2019.
The Diversity of the Members of Bank Management Bodies
In order to balance the management decisions of a bank’s top management with its strategy and business plan, the NBU plans to introduce the principle of diversity in the appointment of members of a bank’s management bodies. In this case, the principle of diversity means a situation in which the characteristics of the members of the management body, including their age, gender, geographical origin, educational and professional experience, differ to the extent that allows a diversity of opinions within the management body.
According to European experience, adherence to the “diversity” requirement increases the effectiveness of the decision-making process by reducing “group thinking”, promoting the expression of independent opinions and constructive feedback, as well as expanding the range of knowledge, skills and values among the members of management bodies.
The NBU is going to assess the financial condition of bank shareholders, as well as other individuals who indirectly own or intend to acquire corporate rights, not only with fairly severe formal normative indicators of solvency and financial sustainability. In this case, serious attention will be paid to essential analysis of the activities of these individuals, the performance of their obligations to the parties, the absence of significant violations of financial obligations, etc.
Where Does the Money Come From?
The issue of the origin of money at the expense of which the filling of the authorized capital of the bank takes place has always been, and still is, a very important matter. To resolve it, the NBU offers to adopt a Zero-Declaration Law that would allow residents of Ukraine to declare all available property and to pay tax on that property which was purchased from unconfirmed sources and after this has taken place it will be automatically legalized.
M&A Agreements in the Banking Sector
The issue of enhancement of M&A agreements implementation in the banking sector is a matter of priority too. In particular, in order to obtain the prompt receipt of NBU approval for acquiring substantial participation, the NBU supports the introduction of the right for acquirers of substantial participation in a bank, together with the application to the NBU, to file the documents to the Antimonopoly Committee of Ukraine in order to obtain a concentration permit. That is, both of these processes will take place simultaneously and the applicant does not need to obtain the permission of the AMCU before filing documents with the NBU.
Thus, in the near future, Ukraine will be expected to introduce worldwide experience in the regulation of banking activity. First of all, the reforms will affect the solvency and financial stability of banks and their beneficiary owners, qualification requirements for top management, their business reputation, collective suitability assessment, the financial status of a bank’s shareholders, its beneficiaries and purchasers of substantial participation.
The above-mentioned and other novelties should become a significant step for ensuring the stability and reliability of the Ukrainian banking sector in the long run.