The DGF, according to the law, is an institution performing special functions in the area of withdrawing insolvent banks from the market. The main objectives of the DGF are to protect the rights and legitimate interests of bank depositors, strengthen confidence in the banking system of Ukraine, encourage the attraction of funds to the banking system of Ukraine, and ensure an effective procedure for resolution and liquidation of insolvent banks.
The Law provides the DGF with several methods (tools) for resolving a bank's insolvency, i.e. for implementing a set of measures to mitigate the consequences of a bank's financial problems for its depositors and other creditors. This means that after the National Bank of Ukraine declares a certain bank insolvent, the DGF acquires full control over this bank and may (without the consent of the owners or creditors) sell this bank to another person or transfer a part of the banking business to another (acquiring) bank or to a bridge bank established by the DGF. If none of these options is possible or feasible in view of the cost of its implementation, the DGF will pay depositors guaranteed compensation for their deposits, sell the bank's assets and use these DGFs to repay all or part of the claims of other creditors of the insolvent bank, and the bank itself will be liquidated.
Until a bank is declared insolvent, the DGF supports the efforts of the NBU and the bank itself to solve the problems that may lead to bankruptcy, and at the same time begins preparations for the bank's withdrawal from the market. At this stage, the DGF only monitors the bank's compliance with the requirements of the Law on Maintaining a Database of Guaranteed Deposits and carries out non-public actions in preparation for a possible resolution.
If a banking institution has not resolved its problems itself, the DGF starts the resolution process immediately after it is declared insolvent and tries to quickly sell all or a significant part of the banking business to a solvent bank or a pre-qualified person. However, some banks, for example, those that have breached financial monitoring requirements, are not subject to resolution and immediately enter liquidation upon the NBU's decision.
In order to protect the interests of depositors and creditors, the law requires the DGF to use the least costly method of withdrawing a bank from the market. For that purpose, the DGF determines the value of the bank's assets, conducts an open tender and prepares a resolution plan that justifies the chosen way of resolution. Also, if a systemically important bank is being withdrawn from the market and cannot be liquidated without negative consequences for the entire banking system, the resolution may be carried out with the participation of the state or through the establishment of a bridge bank by the DGF for a period of up to two years.
In this way, timely resolution measures ensure that the consequences of a bank's failure for all guaranteed depositors and other creditors are minimal or even imperceptible.
However, if investors or receivers are not interested in acquiring the bank during the provisional (temporary) administration, or if they submit unacceptable bids, the DGF initiates the liquidation of the insolvent bank. The DGF then sells the bank's assets and uses the proceeds to pay creditors in accordance with the priority established by law. The liquidation process usually takes several years - until the last asset of the bank is sold. If the DGF is unable to use the bank's assets to pay off all creditors, the DGF attempts to recover the creditors' losses from the bank's owners and managers who allowed the bank to go bankrupt.
Upon completion of the liquidation process, the resolution plan is completed.
Historical examples
The DGF has experience in resolving the following banks:
"Astra Bank" – 100% of the bank's shares were sold to an investor;
"Ukrgazprombank" - 100% of the bank's shares were sold to an investor, but the investor did not bring the financial condition of the insolvent bank to normal and the bank was liquidated;
"Promeconombank" – part of the assets and liabilities was transferred to "Fidobank";
" Bank Zoloti Vorota" - part of the assets and liabilities was transferred to "Standard" Bank;
"Terra Bank" – DGF had created a bridge bank "Crystal Bank", part of the assets and liabilities were transferred to "Crystal Bank" and then the bridge bank was sold to an investor;
"Omega Bank" – DGF had created a bridge bank "RVS Bank", all assets and liabilities were transferred to "RVS Bank" and then the bridge bank was sold to an investor;
"Diamant Bank" - part of the assets and liabilities was transferred to "Taskombank";
"Bank Novy" - part of the assets and liabilities was transferred to "Tascombank".
"Kominvestbank" - part of the assets and liabilities was transferred to "Asvio Bank"
The following banks were also successfully resolved with the participation of the state:
"Kyiv", all assets and liabilities were transferred to the state-owned bank "Ukrgasbank";
"Privatbank", liabilities of shareholders and related parties were bailed-in (converted into shares of the bank) and then 100% of the bank's shares were sold to the state represented by the Ministry of Finance of Ukraine;
"Sense Bank", 100% of the bank's shares were sold to the state represented by the Ministry of Finance of Ukraine and then wrote off the liabilities of the bank's sanctioned shareholders and related parties.