In 2016, the National Bank of Ukraine met the requirements set out in the IMF’s MEFP and completed its diagnostics on related party lending by banks. In 2016, the NBU conducted diagnostics for 81 bank. Another 18 banks passed the related-party lending diagnostic review in 2015.
“Completion of the related-party lending diagnostic review is a critical step toward restoring the stability of the banking system. Related-party operations were one of the major challenges faced by Ukrainian banks. Under normal conditions, raising deposits to lend out to their own business does not pose a serious threat to banks. However, in times of a financial crisis banks’ owners would rescue their core business than keep the bank afloat, which could it into insolvency. Not once have we seen such bank failures in previous years,” said NBU Deputy Governor Ms Kateryna Rozhkova. Efforts are under way to finalize and approve reduction plans to unwind related-party exposures submitted by banks that are given up to three years to address related party issues. In its turn, the NBU tightens monitoring of related-party transactions and oversight over compliance with these plans.
The results of the diagnostic review have identified that the ratio of the maximum credit exposure to related parties exceeded the required level in 44 banks.
By the beginning of 2017, four out of the banks that failed to comply with the prudential norms had been withdrawn from the market and another four banks brought their ratios in compliance with the NBU regulatory requirements.
By the end of 2016, the regulator had approved three-year reduction plans to unwind related-party exposures submitted by eight banks. 15 more plans submitted by the second group of top-20 banks and subsequent 20 banks are currently under review by the NBU. In 2017, the remaining 30 banks are expected to submit their plans to bring he ratio of the maximum credit exposure to related parties to the required level within the next three years.
In 2016, the NBU approved a framework for monitoring of related parties exposures and identification of related parties based on the criteria of relatedness. Approval of this framework will facilitate the identification of bank’s related parties and monitoring of new counterparties that that fit the criteria of relatedness. This document has tightened the statistical reporting requirements and will enable the regulator to identify equity right ownership chain of a related party, relationship between the bank’s owners an related parties, and carry out a continuous monitoring of related-party transactions.
“The NBU has applied a unified methodological approach to the diagnostic studies of banks developed in line with international best practices. This approach has helped to give a real picture of related-party exposures. Having more efficient mechanisms in place to identify related parties enabled banks to design reduction plans to unwind related-party exposures,” said Head of the NBU Related Parties Monitoring Office Mr Oleksii Rudyi.
Under the Law of Ukraine On Banks and Banking, the bank’s related parties shall be the following:
- bank controllers;
- the persons having a qualifying holding in the bank, and persons through which indirect ownership of the qualifying holding in the bank is exercised by such persons;
- the bank managers, head of the internal audit service, chairmen and committee members of the bank;
- the bank’s congenerous parties and affiliates including banking group participants;
- the persons having a qualifying holding in the bank’s congenerous parties and affiliates;
- the managers of legal entities and banks’ managers who are bank’s congenerous parties and affiliates, head of the internal audit service, chairmen and committee members of such persons;
- the associated persons of the individuals specified in paragraphs 1-6 of this definition;
- the legal entities where the individuals mentioned in this part are managers or qualifying shareholders;
- any person, through which a transaction is performed in the interests of the persons referred to in this part, and which is influenced during such transaction by persons referred to in this part, through labor, civil and other relations.