The NBU welcomes parliament’s adoption of the Law of Ukraine On Amendments to Certain Laws of Ukraine on Improving Corporate Governance in Banks and other Operational Issues of the Banking System.
"The passing of the law will further align Ukrainian banking laws with EU laws, while also facilitating the adoption of the best global practices in banking regulation," said NBU Governor Kyrylo Shevchenko. "The law will increase bank management bodies’ responsibility for decision-making, which will promote the stability of the banking system, and the protection of the interests of depositors and other creditors."
The law sets out new requirements for banks’ council and board members
The law stipulates that corporate governance at banks will be enhanced through increasing the responsibility of council and board members for decision-making, and through setting new requirements for council and board members, in particular regarding their collective suitability.
The law expands the powers of bank councils. More specifically, it extends the list of issues that fall exclusively within the council’s mandate, such as assessing the board’s activities, formulating remuneration policy at a bank, approving and monitoring compliance with the code of conduct and policies to prevent, identify and manage conflicts of interest at a bank. The councils of systemically important banks will be required to establish three standing committees: an audit committee, a risk management committee, and a remuneration committee, which are to be headed by independent directors.
Banks will be required to have all-encompassing systems of internal controls
The law improves requirements for banks’ internal control systems, which are to be integrated into corporate governance systems. Internal controls must be based on the three lines of defense model, according to which internal controls are set at the level of business lines, support units, risk management and compliance units, and internal audit units. This will help improve the quality of governance at banks, including risk management.
The law will also introduce new capital and liquidity requirements
The law will introduce a new capital structure and will require banks to build capital buffers, while also requiring them to hold sufficient capital and liquid assets to cover the risks they are exposed to.
In addition, the law introduces the leverage ratio, which sets capital adequacy requirements, depending on a bank’s total assets and off-balance sheet liabilities.
The requirements for a new capital structure, the capital adequacy ratio based on the new capital structure, together with the requirement that banks hold a sufficient amount of internal capital and liquid assets will come into effect three years after the law is published.
The NBU’s supervisory tools
The law expands the NBU’s supervisory powers through risk-oriented supervision and ensuring there can be a prompt response to any deterioration of a bank’s solvency and liquidity.
The NBU’s new supervisory tools are based on risk assessment and the assessment of a bank’s ability to manages these risks. The regulator will apply the proportionality principle when determining the scope, frequency and whether or not to take supervisory action with respect to banks, depending on the level of their risks and systemic importance.
In particular, the NBU will be given the power to set higher values of mandatory ratios, which will be based on the results of the NBU’s supervisory process. As part of the supervisory process, the regulator will determine the required level of capital and liquidity of banks, taking into account their financial health, business model, risk profile, and the quality of corporate governance. This will help avoid banks’ potential insolvencies and, as a consequence, protect the interests of the depositors and creditors of banks.
The NBU will also determine and assess whether or not a bank’s council and board members have joint knowledge, skills, and professional and managerial experience, as well as whether or not the bank’s council and board members manage and monitor the bank’s activities effectively. The regulator may require a bank to change its council and/or board members, if the current composition of these bodies is unable to ensure effective management and control over its activities.
In addition, the NBU will have the right to require the replacement of the chief risk manager, chief compliance manager, or the head of the bank’s internal audit function, if their professional suitability or business reputation do not meet the requirements set by the regulator.
The adopted law also clarifies certain provisions of banking legislation, in particular regarding the licensing of banks, approval of the acquisition of qualifying holdings in banks and requirements for bank ownership structures, and consolidated supervision of banking groups.
In general, the law will improve the quality of the banking sector’s functioning and promote its stability, which will ensure better protection of the rights and interests of depositors and other creditors of banks.
The passing of this law represents the implementation of the commitments made by Ukraine in accordance with its Memorandum on Economic and Financial Policies with the International Monetary Fund of 2 June 2020.