Seven years after “bankpocalypse,” the orgy of insider lending and bank fraud that left only 73 banks standing from a high of more than 180 on the market, the Deposit Guarantee Fund sees an end in sight to its attempt to recover at least a fraction of the estimated $20 billion in taxpayer losses.
The institution has been working its way through 97 insolvent banks, trying to sell off their mountain of assets, once estimated to be worth $18 billion. Today, 51 banks have been completely liquidated, leaving several dozen more and about $3.6 billion to get through.
Managing director Svitlana Rekrut told the Kyiv Post that this will be just one of her challenges in the next few years.
“Next year will be a year of transformation or the fund’s transition from old problems to new priorities,” she said.
The biggest priority is, of course, its $4.1 billion debt to the state, which will have to be restructured. The fund’s only hope of paying it back is to go after the dead banks’ former owners and “related parties,” to force them into monetary settlements in Ukrainian and overseas courts.
Only then can the fund meet its goal to ensure up to $122,000 per depositor, which is the standard in the European Union. Today, each depositor is guaranteed only $7,300. Rekrut said this limit will be increased to $21,800 by 2023. The fund is also expanding its coverage from banks to credit unions and insurance companies.
“This will send the message that the financial system is fully stable, that the crisis is over, that the market has absorbed it and we can move ahead with full-fledged development,” she said.
Growing debts
Before the EuroMaidan Revolution that ousted President Viktor Yanukovych in 2014, Ukraine’s banking system was rotten to the core. Pocket banks were rife, existing only to lend money to their owners’ other companies at the depositors’ expense.
When Ukraine’s banking reforms kicked in from 2014 through 2016, the National Bank of Ukraine yanked close to 100 insolvent banks, with an estimated half a trillion hryvnias in assets, off the market. The Deposit Guarantee Fund, created to safeguard depositors, went to work.
But there was a problem. People who had money in these banks had to be compensated to the tune of $3.3 billion. The fund only had $254 million. To do its job, it had to take out huge loans from the Ministry of Finance and the central bank, with market-level interest rates of 9–12%.
With interest, the fund’s debt to the government has ballooned to $1.7 billion plus $2.3 billion interest. There is no way that the fund can pay this off by liquidating dead banks’ assets, especially after so much time has passed and the value of these assets has dwindled substantially.
“The fund is not a profit-making business and we have no source of income to be able to pay this interest back,” said Rekrut. “For the fund to be a full-fledged link in (Ukraine’s) financial stability network, it must be a strong, financially stable organization. Until we work out the financial legacy of 2014, that’s not something we can talk about.”
A strategy to restructure this debt has already been worked out with the Ministry of Finance, the NBU and international financial institutions, Rekrut said. Now it needs to be approved by parliament.
Under the plan, the fund will pay off the core debt using regular payments from active banks. Money to pay interest will have to be squeezed from “related parties,” which have caused an estimated $8 billion in financial damage.
Rekrut acknowledged that recovering the full amount is unlikely. How much the fund gets back depends on political will in Ukraine and cooperation with international jurisdictions, where “related parties” often laundered their money.
“Global practice shows that (court) settlements are what leads to cash flow,” she said.
Even under the best of circumstances, litigation can take years. The fund’s cumulative recoveries from the banks’ asset management and asset sales is only 12%.
Fighting former owners
Fighting the banks’ former owners, who like to use the courts to keep the fund from doing its job, takes a great deal of time and effort. There are 460 lawsuits open right now. The $3.6 billion worth of unsold asset pools that have partly been blocked from going to auction by court cases.
Rekrut said that while 60% of court cases are eventually resolved in the fund’s favor, the remaining 40% still pose major obstacles. Lower courts tend to rule against the fund, while the cassation courts typically overturn these decisions.
“In the first and second instances, not everything is in order, unfortunately,” said Rekrut. “We still get bans on (asset) sales to keep anyone from buying them. But in the Supreme Court, as a rule, fairness triumphs.”
Despite these triumphs, it takes years to go through all three instances. In the meantime, as auctions are blocked and assets go unsold, their value quickly deteriorates. In 2015, the fund was able to recover 43% of bank assets. In 2020, it was only able to recover 1%.
“We have no problem selling assets, we have one problem: the cost of that asset,” Rekrut said.
Still, there’s progress.
Last year, Zelensky signed the so-called “anti-Kolomoisky” law, named after the billionaire oligarch Ihor Kolomoisky who faces lawsuits for emptying PrivatBank of $5.5 billion and sticking taxpayers with the losses.
The law prevents insolvent banks’ former owners from reclaiming their moribund institutions. After it passed, the fund reclaimed four zombie banks and judges shut down several lawsuits brought by related parties.
“The system is working,” said Rekrut. “Not completely but it’s working.”
Increased reaction speed
The scope of fraudulent schemes in the banking sector has also shrunk considerably. The banking collapse of 2014–2016 revealed massive, lurid schemes as shocking as they were damaging — with the now nationalized PrivatBank, the country’s biggest bank, as the biggest Ponzi scheme.
That doesn’t happen so much anymore, Rekrut said. More importantly, the NBU and the fund have each set up early warning systems, allowing them to respond much faster to a bank that may be headed towards insolvency.
As a result, the fund was better prepared to respond to recent cases like the November 2018 bankruptcy of the Ukrainian branch of VTB Bank and the December 2020 bankruptcy of Misto Bank.
Putting a dead bank’s assets on sale used to take at least six months in 2014. After Misto went bankrupt, its assets were on sale in less than 60 days, which Rekrut called a “massive breakthrough.”
This lets the fund recover more money and makes it harder for a bank’s former owners to clean the place out before the liquidators arrive.
“Reaction speed monetizes into cash flow for creditors,” Rekrut said.
But some banks have their own early warning system. Shortly before Bank Arkada was taken off the market in August 2020, it lost its main asset — its headquarters on Independence Square in central Kyiv — which it used as collateral in a loan agreement.
Rekrut believes this was a bogus deal, made to keep the property out of the hands of the fund, which is fighting for control of the building, having recently lost its case in the Kyiv Court of Appeals. Instead of waiting to win the asset before putting it on sale, the fund is selling investors the right to join the lawsuit.
