Dear colleagues!
I would like to inform you that yesterday the National Bank of Ukraine declared Privatbank PJSC insolvent and approached the Government with a proposal to transfer this systemically important bank into the ownership of the state.
We are delighted that the Cabinet of Ministers of Ukraine has backed our proposal and approved a decision on transferring the bank into 100 percent State ownership. This move will enable our country to ensure the security of savings deposits held by individuals and funds held by corporate clients at this bank. This step will also help avert risks to financial stability in the country.
We feel confident that the decision to transfer the bank into the ownership of the state is the only possible way to protect deposits placed with this bank and rescue the financial system. By doing so, we protect over 20 million Ukrainian citizens that use services provided by this bank and hold their funds there. We include here 3.2 million pensioners, over 500,000 students, and 1.6 million socially vulnerable households.
To ensure the maintenance of financial stability and prevent further social tensions, it is equally important that 500,000 sole proprietors will not lose their funds and will continue operating smoothly, as well as 600,000 SMEs.
Over 3.6 million employees will maintain access to their payroll accounts, including 2.2 million public sector employees and 1.4 million private sector employees.
Which problems faced by PrivatBank posed risks to the domestic financial system?
Over two years ago, the NBU launched the most comprehensive diagnostic studies in the history of the banking sector that comprised an asset quality review (AQR) and assessed capital needs faced by banks. So far, the NBU has completed the diagnostic studies for the 60 largest financial institutions, representing 98% of the banking system.
Inspections and stress tests carried out by the NBU revealed that PrivatBank had capital shortages. As of 1 April 2016, the bank had capital shortages amounting to UAH 113 billion, which, apart from crisis-related factors, were caused by imprudent lending policies pursued by the bank. As of 1 November 2015, related-party loans accounted for 97% of the bank’s loan portfolio, totaling UAH 150 billion.
PrivatBank, as well as other financial institutions where capital shortages were revealed based on the results of stress tests, were required to address these capital shortages, as the rules are the same for all financial institutions.
The bank’s management team designed a recapitalization program and a program to unwind related-party lending. The bank’s shareholders also provided guarantees as proof of their commitment to implement the recapitalization program agreed to with the NBU.
However, neither the bank nor its shareholders implemented the program. Over the past year, the NBU has held over 30 meetings with the shareholders and managers of this financial institution. Given that PrivatBank is a systemically important financial institution, the NBU took a more flexible approach, extending deadlines for fulfilling the recapitalization program on many occasions.
As a result, as of 1 December 2016, capital shortages faced by PrivatBank increased to UAH 148 billion and its liquidity deteriorated significantly. The bank has not complied with reserve requirements for a year. The past-due debt owed to the NBU for stabilization loans amounts to UAH 14 billion out of a total outstanding debt of UAH 19 billion.
Being aware of all the problems faced by PrivatBank and risks posed to the health of the financial sector and the economy as a whole, we could not wait any longer.
Also, being aware of their inability to fulfill the recapitalization program, the shareholders filed a letter with the Cabinet of Ministers of Ukraine requesting State equity participation in the bank. The shareholders hereby undertook commitments to restructure loans issued by the bank to corporate clients by 1 July 2017, taking into account requirements set by the NBU.
I would like to stress that PrivatBank will be transferred into the ownership of the State in accordance with Article 41.1 of the Law of Ukraine On Households’ Deposit Guarantee System, which establishes the rules governing the sale of an insolvent bank to the State.
We have developed a clear Action Plan to make the transfer of PrivatBank into the hands of the State as painless as possible, and at the same time reduce risks to the financial system’s stability.
• The Bank will continue to operate and will keep card transactions and payments going as usual.
• The provision of services to corporate clients will be temporarily suspended for one day (19 December) for technical reasons.
• Customers will face no other restrictions.
• Customers will have unrestricted access to their current and savings deposits, but they will not be allowed to withdraw their long-term deposits before maturity.
• ATMs and POS terminals will keep operating and settlement transactions will continue to be carried out through them.
We are aware that the situation surrounding this bank raises concerns not only among its clients, but also among all Ukrainians. Will price growth accelerate? Will the hryvnia depreciate sharply?
We want to provide reassurances that the situation is kept under control.
Beginning Monday, the NBU plans to provide liquidity support to the bank if the bank needs liquidity to ensure the repayment of deposits. Since long-term deposits constitute the largest share of the portfolio of deposits, the NBU does not expect PrivatBank to face significant deposit outflows and this move will have a limited impact on inflation and the FX market.
In any case, the NBU has enough tools in its toolkit capable of mitigating excessive exchange rate volatility. Ukraine’s international reserves amount to USD 15.5 billion. This amount is sufficient not only to conduct currency interventions by selling foreign currency, but also enables the Government and the NBU to settle their foreign debt obligations.
I would like to stress once again that all the funds held by individual and corporate clients not related to the bank’s shareholders are under the protection of the State.