The Constitutional Court has destroyed government accountability and anti-corruption agencies. Now it’s poised to destroy the banking system.
On Nov. 3, the court will examine the constitutionality of the Deposit Guarantee Fund, which is in charge of liquidating insolvent bank assets and returning as much as possible to creditors and depositors.
Since 2014, over 100 fraudulent banks have been taken off the market. The fund has sold off their assets and returned Hr 94 billion to people that lost money.
There’s a strong likelihood that the court will rule that the law creating the deposit guarantee system is unconstitutional.
If that happens, every bank liquidation, every asset sale, every depositor payout and all other work done by the fund will be null and void and subject to be challenged in courts.
Depending on how the decision is worded, it might open the way to millions of court cases overnight. It would also strip away statutory guarantees for depositors, leaving them completely exposed if their bank goes under.
The economic and social consequences for Ukraine would be overwhelming. This could also inflict a deep wound to the European Union association agreement and drive the last nail through the coffin of further lending from the International Monetary Fund.
“I am absolutely sure that the recognition of this law as unconstitutional will destroy the system of guaranteeing individuals’ deposits, undermine confidence in the banking system, make the system as vulnerable as possible and harm the interests of millions of depositors,” National Bank of Ukraine (NBU) head Kyrylo Shevchenko said during the Constitutional Court’s prior hearing on the matter on Sept. 15.
“Only the reform of the deposit guarantee system… prevented public panic and mass outflow of deposits from the ‘healthy’ portion of the banking system,” in 2014-2016 the Fund’s managing director Svitlana Rekrut said after the hearing.
The decision would also threaten the nationalization of PrivatBank, which was bailed in and acquired by the government in accordance with the law that’s currently being disputed.
This may help PrivatBank’s former owner Ihor Kolomoisky either make a successful bid for the bank’s return or to force the Ukrainian government to stop trying to squeeze $5.5 billion out of him, to pay back for the bank’s rescue.
There are two primary challenges to the law. One is that its creation violated the separation of powers and that its function should fall under the purview of the NBU.
Shevchenko had written that this is false. The NBU and the Fund have distinct powers that do not contradict one another and the Fund is subordinate to parliament, the Cabinet and the NBU, he added.
The other is that the fund only pays out a maximum of Hr 200,000 to individual depositors. This is prejudicial against people with larger deposits, according to lawmaker Vasily Humeniuk’s statements to the Constitutional Court on Sept. 15.
But deposits of Hr 200,000 or less covers 98% of all individual depositors.
“These people do not have the tools to protect their interests that banks have, and they are protected by the current law, guaranteeing the return of deposits up to Hr 200,000,” wrote Viktor Novikov, the fund’s legal director. “These people may be left without important social protection.”
The fund has stated that its ability to increase that amount depends on its ability to guarantee deposits. The fund currently owes more than Hr 100 billion to the government and more than half of that amount are interest payments. The debt was created during the bank collapse of 2014-2016, when the government and the NBU provided Hr 80 billion to the fund to be able to compensate as many depositors as possible.
The law sat in the Constitutional Court since 2016 but the court only started actively examining it in June, not long after parliament passed the so-called “Anti-Kolomoisky Law,” which prevents insolvent banks from being returned to their former owners. These banks’ liquidation must continue regardless but owners may be entitled to money if they successfully challenge the insolvency declaration in court.
The constitutional court may decide to strike down only parts of the law. This could still be very dangerous, depending on which articles are eliminated.
Articles 6 and 52 are the most vulnerable. If the court strikes down article 6, it would eliminate the Fund’s regulatory authority and nullify all regulations that are connected to the Fund. This would be tantamount to dismantling the entire law. Striking down article 52 would prevent the Fund from being able to go after insolvent banks’ former stakeholders and disrupt its ability to make these banks’ creditors whole.
Much depends on how the decision is worded. If the wording is not clear, the decision may lead to every depositor having to go to court to figure out their place in the order of payouts.
The law is a big part of Ukraine’s financial stability system and a precondition for continued relationships with the EU, IMF and the World Bank, according to Shevchenko.
If the Constitutional Court rules that the Deposit Guarantee Fund is unconstitutional, it will “abolish existing mechanics for de-marketing of insolvent banks,” according to Olena Savchuk, senior associate at Integrites, a Kyiv-based law firm.
“The NBU does not possess practical capacity to do that – the Fund has been the only body dealing with this area,” Savchuk told the Kyiv Post. “It currently manages liquidation of 48 banks, all at different stages, and the decision of the Constitutional Court would effectively immobilize its further actions towards such proceedings. If the law is declared unconstitutional in its entirety all new proceedings would also be blocked, at least before new statutes are adopted.”
“Unconstitutionality of the law would cast a shadow on the status of all previous bank liquidations and sales, PrivatBank to say the least,” Savchuk added.
Additional reporting by Anna Myroniuk, Malek Banat
