24. The authorities’ bank restructuring program is progressing. The resolution strategies for the five systemic problem banks have been finalized. Diagnostic studies for the nonsystemic banks have been completed on time and the legislative changes necessary to ensure effective bank resolution have been prepared. The initial public cost of bank restructuring is estimated at around UAH 25–30 billion (about 3 percent of GDP) in addition to the capitalization of the state banks Oschadbank and Eximbank of about UAH 15 billion (about 2 percent of GDP). Efforts to enhance supervision and data transparency are underway, but progress has been slow as the bank restructuring work takes priority.
25. Most systemic banks have injected the necessary regulatory capital ahead of schedule and the remaining are put on a time-bound action plan. For the systemic banks (which account for about 85 percent of capital of the banking system), the shareholders of most private banks have committed to inject the necessary capital totaling about UAH 21.5 billion ($2.6 billion) and have already brought in the necessary capital ahead of schedule. NBU has put several banks under enhanced monitoring and restricted their activities until they fully comply with the relevant regulations. It is also following up closely with the respective shareholders to ensure that the remaining capital pledges are received. A specific unit within the NBU has been formed to oversee this process.
26. The authorities are committed to a swift resolution of systemic problem banks. The shareholders of seven domestically-owned banks were not able to commit initially to injecting the additional capital and the NBU has initiated measures to safeguard bank assets in these banks, including the introduction of temporary administration. The shareholders of two of these banks found the criteria for state involvement too onerous and have opted to raise the required capital by their own means. The authorities have put together a resolution strategy for each of the remaining five systemic problem banks and have started implementation. Capital needs of these banks have been calculated at about UAH 20 billion by international audit firms based on an update of the diagnostic study results and the banks will undergo a thorough due diligence that includes an assessment of restructuring options post-recapitalization. For three of these banks the resolution strategy is being implemented, including the dilution of the shares of existing shareholders to an agreed 23 value, recapitalization by the government and appointment of a professional management. For two other banks, restructuring of debt to external creditors needs to be advanced ahead of the finalization of the resolution strategy. To ensure rapid progress of the restructuring process, the authorities have completed the setup of the relevant units at the MoF and the NBU.
27. The two existing state banks have been recapitalized in line with the diagnostic results and have received extra capital cushion. However, recent quasi fiscal operations, including large exposures to state-owned enterprises may have implications for the financial position of these banks. The authorities agreed to follow up with a due diligence of the banks, and to design a restructuring strategy as needed on the basis of the results.
28. The diagnostic studies for the nonsystemic banks have been completed. While the overall capital needs of these smaller banks are manageable, inadequate risk management practices and large amounts of connected lending raise concerns. The shareholders of 31 banks have committed to provide additional capital amounting to about UAH1.6 billion by December 2009. The NBU is in the process of finalizing resolution strategies for those banks that are unable to raise the necessary capital and those that are not in compliance with relevant prudential regulations.
29. Necessary legal amendments to strengthen the bank resolution process have been planned. The main objective of these amendments are to enable transfer of assets and liabilities without prior approval of creditors, simplify the process for bank mergers and acquisitions, enable the government to provide funds for banks under resolution by the NBU, and provide the respective staff the necessary immunity while executing their tasks in good faith. The amendments will form the basis for the workouts of the non-systemic insolvent banks and are important to avoid legal risks and procedural delays.
30. The mission discussed the design of the recapitalization bonds with the authorities. Under the existing anti-crisis legislation, the NBU is obliged to purchase the recapitalization bonds from the banks if these desire to redeem the bonds for cash. To avoid undue increase in the money base and limit financial risks to the NBU, liquidity needs of the recapitalized banks will be satisfied based on projected needs and an agreed upon schedule.
31. Measures to strengthen the supervision framework and data transparency are underway. The authorities are preparing draft legislation and regulations to implement consolidated supervision and provide for supplementary supervision of conglomerates. Also, the authorities have started to publish bank-by-bank data and are committed to start publishing more detailed financial information on banks by September 2009. To improve communications with the home supervisors of parent banks, the authorities plan to complete all pending MoUs with their counterparts by end-2009.
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