Do you or your bank own the money on your cur­rent ac­count?

Kyiv Post Legal Quarterly - - News -


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.

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