With effect from January 2015 Ukraine has introduced (i) a simplified procedure to increase the capital of, or reorganize, a bank that does not meet the capital adequacy requirements and (ii) a detailed procedure for the emergency government bailout of such a bank.
The measures came into being when on 28 December 2014 the Ukrainian Parliament adopted the Law of Ukraine "On the Measures to Facilitate the Capitalization and Restructuring of Banks" (the "Capitalization Law")
Implications for banks
The need for additional capitalization results from an audit carried out at the request of the National Bank of Ukraine (the "NBU") by an audit firm approved by the NBU. Under the Capitalization Law a bank that did not pass an audit must propose a plan for additional capitalization and/or restructuring to achieve the minimal capital adequacy level set by the Capitalization Law and this plan must be approved by the NBU. If the NBU approves the plan, an undercapitalized bank must conduct capitalization/restructuring within the period specified by the NBU. If the bank fails to submit a capitalization/restructuring plan or the shareholders of the bank are unable to provide the desired level of capitalization the NBU can, among other things, propose state involvement in the bank to the Cabinet of Ministers of Ukraine or recognize the bank insolvent.
What the Law says
I. Expedited procedure for the capitalization of banks
The Capitalization Law provides an expedited procedure for capitalization and/or restructuring of Ukrainian banks. In comparison to the general banking and corporate legislation, it sets shortened periods, inter alia, for:
- • announcement of a general meeting of a bank's shareholders (not less than five business days before a general meeting);
- • conclusion of agreements on purchase of additionally issued shares (not more than two business days after the general meeting);
- • transfer of funds for the purchased shares (not more than five business days after conclusion of an agreement);
In addition, the Capitalization Law suspends the application of certain provisions of Ukrainian legislation. These, inter alia, include:
- a requirement to notify all creditors of a bank about the decision of a general meeting on reduction of the share capital of the bank or dissolution of the bank by the way of reorganization;
- restriction on the minimum par value of a share;
- requirement to liquidate a bank if the bank's share capital is less than a minimum amount determined by the law;
- mandatory share buy-backs at the demand of a bank's shareholder;
- requirements for the quorum of a general meeting of shareholders. The Capitalization Law stipulates that decisions of a general meeting concerning capitalization and re-organization of a bank and approval of placement of shares are taken by a simple majority of votes.
II. Participation of the state in the capitalization of banks
The Capitalization Law specifies the methods and conditions for state participation in the capitalization of banks. It stipulates that the state can participate by:
- the acquisition of shares of an additional issue in exchange for sovereign bonds; or
- provision of loans in the form of sovereign bonds on the terms of subordinated debt secured by pledge of shares of a bank ensuring the right of the state to use and dispose of not less than 75 percent of the bank's shares.
The Capitalization Law establishes a moratorium on share buy-backs and distribution of dividends by banks requiring additional capitalization.
IV. Expanded authority of the National Bank of Ukraine
The Capitalization Law amends the Law of Ukraine "On Banks and Banking Activity". The amendments expand the authority of the NBU and empower it to establish temporary measures for regulation and supervision of banks when there are signs of danger to the banking system of Ukraine. These, inter alia, include the authority:
- to establish measures supporting the liquidity of banks;
- to restrict or prohibit withdrawal of funds from current and deposit bank accounts of legal entities and natural persons;
- to restrict or temporarily prohibit foreign currency transactions in Ukraine, including transfer of foreign currency out of Ukraine.
The Capitalization Law was adopted in response to the ongoing crisis in order to ensure economic security and protect the banking system of Ukraine from collapse. It affects banks requiring additional capitalization and provides an expedited procedure for capitalization/restructuring of banks. In addition the Capitalization Law empowers the NBU to establish temporary measures for regulation and supervision of banks.