Ukraine: Capacity Building in Bank Resolution
Together with the World Bank and other donors (the U.S. Agency for International Development, the Government of the Netherlands), FIRST funded TA to provide just-in-time capacity building for the Deposit Guarantee Fund (DGF) to resolve and liquidate two small private banks. The TA started immediately after the DGF was given a new mandate on bank resolution by the Government of Ukraine and was implemented intensively during January-May 2013.
Challenge:
In the context of massive bank failures resulting in extensive losses for Ukraine's banking sector during 2008-2010, the Government of Ukraine transformed the DGF from a simple pay-box deposit insurer into a deposit insurance system with a bank resolution agency mandate, effective September 22, 2012. Nonperforming loans were estimated at about 35 percent of total gross loans, and a wave of bank failures became a real threat to Ukraine's banking sector during this time. The objective of reforming the DGF was to reduce the overall cost of bank failures by promoting early interventions, to maximize the value recovered from bank assets, and to restore market confidence.
On October 31, the DGF received its first test case of its new mandate-to handle the provisional administration and subsequent liquidation process of a small, private bank. The DGF has 90 days in which to take control of the bank, take stock of its assets and liabilities, conduct evaluations, determine the least-cost option for resolution, put forward information to the market for potential investors, and conduct liquidation. Handling this process smoothly was a critical learning experience for the DGF and also an important signal to the market that the DGF can carry out its new mandate to restore public confidence.
Solution:
Responding quickly to the DGF's request, FIRST funded a small TA project of $125,000 to bring in a team that included an international expert who was a former bank liquidator and bank resolution expert at the U.S. Federal Deposit Insurance Corporation (FDIC), a World Bank senior deposit insurance expert, and a local legal expert, to build operational capacity in bank resolution and liquidation for the newly formed team at the DGF.
During the three fieldwork missions that took place from January to May 2013, the team provided advice, guidance, templates, and training to DGF staff on how to implement the detailed processes of a bank resolution plan and a liquidation plan, how to conduct valuation of bank assets, and how to prepare assets sales and bid documents. Case studies of the resolution of a problem bank and a liquidation plan were used during the training. In the process, the DGF team benefited from technical tools used by the FDIC for asset evaluation such as cash flow and net present value worksheets. The expert summarized lessons learned from the first bank resolution to be used for the second one.
The team also reviewed DGF regulations against the Civil Code and existing financial sector laws for discrepancies and potential conflicts, and advised on amendments needed in order to enable the smooth implementation of bank resolution and liquidation in the future. The team also provided comments on the draft Strategic Plan 2013-2017 for the DGF.
Results:
As a result of the TA, the DGF obtained just-in-time assistance to carry out bank resolution and liquidation plans for two failed banks. In the view of its management, the DGF has substantially improved its capacity to carry out this work. The success of the initial TA has led to another request to FIRST to follow up on the expert recommendations and further strengthen the DGF's resolution and liquidation capacity as well as its capital reserves, in order to make funding adequate in hard times without using taxpayers' money. The follow-up project, worth $260,000, was approved by FIRST and is being implemented from September 2013 to June 2015.