Do you or your bank own the money on your current account?
the last several years, more than 80 banks in Ukraine have been declared insolvent. Business entities and private citizens have lost billions of hryvnias that was on their current accounts. We’ve got used to the news of another bank turning into an empty can, from which all funds have been washed out, leaving zero chances for restitution. It looks like there can be no happy end for stories like these. Here I’d like to shift your attention to a little detail which the banks avoid disputing, and which changes the whole scene dramatically: it is whether your bank owns the funds in your current account?
Let’s take a look from different angles:
the comparative and common sense approach: Today, hryvnia is issued by the National Bank of Ukraine and are declared to be the only legal payment instrument in the country. But the law limits the ability of legal entities and natural persons to make settlements in cash, thus forcing us to use cashless payment systems. The NBU empowers its agents — the banks — to register and account all transactions with these financial instruments — cash — on bank accounts. Being just a registrar and a bookkeeper, banks are not allowed to operate with your money until you decide to enter into a deposit or trust account agreement with the bank. A current account shouldn’t be confused with a deposit account – where one concludes another agreement on a bank deposit, under which funds are borrowed by the bank and title to the funds is transferred to the bank’s ownership. In fact, accounting your money on your account itself does not provide your bank with any rights to your money. Let’s compare a current account with accounts in securities (shares, bonds, etc.) — the latter is also opened by banks serving as depositaries of securities. If the insolvency of a bank were to lead to the loss of title to shares by shareholders of a jointstock company, who would keep shares in such an account opened with a bank? Another example: could you imagine that the hypothetical insolvency of the state registrar service or the state land cadaster would lead to losing your title to your house or land plot? them on a current account opened with a bank. One cannot find any title transfer wording, or even transfer in trust provisions or orders while communicating with the bank regarding servicing your current bank account — unless you explicitly order the transfer of your money from your account to an account belonging to the bank. Even the wording ‘ transfer from account to account’ is not logically correct, because the title is transferred from person to person, with due reflection in the accounts. Changes in accounts are just the registration of a transaction for the transfer of a virtual financial instrument.
There is no formal or common sense reason to stick to archaic image of the bank as the custodian of your money. This paradigm has sunk into oblivion, together with real money made of gold and silver — for better or worse. Today’s currency is a virtual thing — even that of paper. There’s no doubt that this ambiguous and non-transparent situation — is artificially supported by the banks in order to get profit from operating with your money, while not entitled to do so. The insolvency of a bank should not have any adverse effect on current accounts — which are simply a register kept by a bank, acting as the NBU’S agent. Such a register is subject to transfer to another agent as it is. But such approach could hardly be supported by the NBU, which cares for the banks and their business first.
in the short run is possible non-compliance by a few large banks with recapitalization programs, which were based on diagnostic studies,” said Gontareva.
These reports prompted withdrawals from Privatbank. On Dec. 16, there were reports that Privatbank had limited daily withdrawals from ATM machines.
Bu now, Privatbank has effectively become a second Oschadbank - a mammoth business run by the state.
The amount that could have been siphoned out of the bank through insider loans may be as high as Hr 163 billion ($6.3 billion), according to NBU data. That is more than Ukraine’s defense budget and at least 5 percent of the nation's economic output this year.
Even after nationalization, Kolomoisky will retain control of the bank’s payment systems, which appear to be owned via separate legal structures, giving him continued leverage.
Political analyst Vitaly Bala said that the threat to destroy the bank has been a main source of power for Kolomoisky. “He’s a very creative businessman,” said Bala, laughing. “But the problem has become too big for the government to ignore.”
The International Monetary Fund has made resolving the Privatbank problem one of the conditions for Ukraine to receive the next loan installment. With upwards of $3.5 billion in payments to foreign creditors due next year, NBU officials may need IMF lending to make it through 2017. IMF lending has stalled at $7.7 billion out of a possible $17.5 billion because of Ukraine's failures on the reform front, including in the banking sector.
Privat party Ukraine’s banking sector is characterized by poor regulation, insider lending, and fraud. Some thought that Privatbank's size alone would protect it, but since its 1992 founding, it appears that its owners also fleeced deposits off its customers through insider loans.
Privatbank has 20.5 million depositors holding $11 billion in assets, out of 45 million Ukrainians with a banking system worth $52.8 billion. That accounts for 21 percent of the sector's assets.
The bank, however, minimized the problem and through last week said it was meeting central bank refinancing requirements and operating normally. It also said that only 17.7 percent of its credit portfolio is related-party loans -a far cry from 93 percent that the NBU calculated. Before nationalization, Dragon Capital placed the amount at between 40 and 80 percent.
According to the NBU figure, the insider lending would amount to $6.3 billion (Hr 163 billion) out of a total loan
three years to gradually fill the hole. But all banks had to attain a capital adequacy ratio of 5 percent by the end of September, meaning that Kolomoisky had to inject money into Privatbank worth 5 percent of its credit portfolio.
“The IMF is funding the country, so they see that there is potentially a hole in the financial system that can be created in an aggravated situation by Privatbank,” said Ihor Olekhov, head of law firm Baker & Mckenzie’s financial institutions practice in Kyiv.
Privatbank’s press service only admitted to a capitalization requirement of Hr 10 billion ($379 million).
A December report from the NBU says that the country’s top 20 banks had an average non-performing loan rate of 53 percent; even at that level, Kolomoisky would have to supply at least Hr 89 billion ($3.4 billion) of his own money to make the bank safe.
The Imf-approved repayment plan had already run into problems by the September deadline. It turned out that collateral for many of the bank’s loans came nowhere near matching the value of the loans themselves - out of a credit portfolio of Hr 180.4 billion ($6.8 billion), Privatbank was able to verify collateral for Hr 31 billion ($1.1 billion), leaving an Hr 148 billion ($5.6 billion) gap.
Danylyuk cited that Hr 148 billion figure during the postnationalization press conference of the maximum amount of money that Ukrainian taxpayer would have to pay.
The IMF duly noted this failure in its September memorandum, referring to “a decision for state participation in On the offensive The NBU determined that Privatbank’s shareholders either could not, or did not want to, repay the loans to recapitalize the bank. Bank CEO Oleksandr Dubilet flew to Washington, D.C., in early October to lobby against the bank’s nationalization. At the same time, lawmaker and metallurgy mogul Serhiy Taruta was at an IMF meeting in Washington distributing a pamphlet alleging corruption in the NBU.
In Kyiv, protests started to appear with more frequency around the NBU. One protest in November, over the collapsed Bank Mikhailivsky, saw thousands of pensioners close down the street on which the NBU is located.
Volodymyr Fesenko, director of the Penta political studies center, said that while Privatbank was likely behind some of the Kyiv disturbances, “the interests of many different factions came together. Batkivshchyna, (businessman Serhiy) Taruta - a political crisis and snap elections would all be to their benefit,” Fesenko said.
What does nationalization really mean? Gontareva said on Dec. 8 that she intended to resolve the issue of Privatbank by the end of 2016.
In its second-ever financial stability report on Dec. 13, the NBU published figures showing that Privatbank was Hr 89 billion ($3.4 billion) short of filling its capital needs. “Resolving this risk demands quick, tough, and coordinated actions by the NBU and the government,” reads the report.
In the week leading up to nationalization, the Ukrainian press was full of rumors. Privatbank's press service released a statement the day after the NBU report on Dec. 14, calling nationalization reports part of a "coordinated information attack."
But by Dec. 18, a joint NBU and Deposit Guarantee Fund team was in Dnipro to begin the takeover.
That evening, the Cabinet of Ministers issued a decision under Article 41.1 of the law on guaranteeing deposits, saying that they had agreed to a request from the NBU to nationalize the bank. Privatbank simultaneously entered into temporary administration as the government bought 100 percent of the shares from Kolomoisky for Hr 1.
The bank now belongs to the Ministry of Finance, allowing the government to inject up to 150 billion in capital to stabilize the institution.
To fund the capital injection, the government will issue Ukrainian treasury bonds to fund the bailout.