Former Minister of Finance Oleksandr Shlapak discusses in his interview with RBC Ukraine
the cases of VAB Bank, attempts at creating a “bad bank”, and the failed experiment to bail out financial institutions of bona fide owners.
You served as Minister of Finance during the crisis year of 2014. At the time an idea was floated to create a so-called “bad bank” based on Ukrgasbank. Troubled assets of which banks could be transferred to it?
Actually, the plan was to use Rodovid Bank as a basis for the bad bank or to form a new bank from scratch. I have no doubt that Ukraine needed and still needs it. It so happened that several financial crisis waves hurt our banks in a big way, and each one of them ended up with a number of bad assets. Something has to be done about them. If you look at statistics, close to 50% of bank assets are bad. In my opinion, it is virtually impossible to handle such assets without a dedicated tool.
I can see how much of a struggle this is for state-owned banks such as Oshchadbank, Ukreximbank, and that same Ukrgasbank. The latter is so far doing the best job of them all. Even PrivatBank would not have coped with its troubled loans without substantial cash infusions from the government. I believe that a large number of privately-owned banks would gladly use the bad bank tool to try and remove these toxic assets from their balance sheets.
How does the bad bank mechanism work? Is it used as a dump for toxic assets from various banks in exchange for a certain percentage, after which the bad bank tries to recover these delinquent loans from debtors, right?
Yes. It is not a new tool. There are banks like this elsewhere in the world. We had a bill drafted jointly with representatives of the Japanese banking sector, since they weathered a crisis like that and also had a bad bank. We also received assistance from the Turks, who also went through this. The idea was to create a troubled assets bank in Ukraine, to which every bank could sell its assets under a specific procedure and at an agreed price.
Instead of regular banking transactions, the bad bank would specialize in recovering such bad assets through the judicial and law enforcement systems. It would be subject not to ordinary bank regulations but to standards specifically designed for it.
Drawing on my experience at PrivatBank, I can say that when a bank executive is forced to waste 70 to 80% of time on chasing after toxic assets instead of thinking of ways to grow the bank, this is no good. In this way we could have helped numerous banks dump their unfortunate past history on this bad bank, thereby freeing up energy for value-adding operations.
Did you discuss VAB Bank in 2014? Is there actually a protocol detailing further steps for the transfer of this bank to Ukrgasbank, as Oleg Bakhmatуuk claims? Did he actually bring 200 million dollars to rescue VAB Bank?
I recall that Bakhmatуuk, unlike many bank owners, fought for his banks tooth and nail. And he did this not the way some owners did it: by staging rallies or using some other dirty tactics. He looked for a way to bail out the bank, if not using his own resources (he had no such resources considering the crisis that hit us all in 2014), then at least by pooling the resources of everybody who would be interested in this.
As far as I recall, several approaches were suggested for continued work with VAB Bank. The first one (and, to my recollection, the protocol concerned this very approach) involved pooling the resources of the state, the National Bank, and VAB Bank owners in order to bail out the bank. I don’t recall Bakhmatiuk ever bringing 200 million dollars in his pockets or bags. He would bring agreements with his partners who were willing – on his word and, obviously, under their mutual contracts – to provide resources in the amount in question, which was roughly 200 million dollars.
Bakhmatуuk was ready to channel these funds into the bank. This amount was insufficient, so he asked the Ministry of Finance to tag along and help. We were also prepared to help finance the bank’s capital in order to rescue it. The third party was the National Bank, which was expected to commit to refinancing of the bank. The bank had a large refinancing loan, and there was no doubt that it had to be prolonged in addition to adopting a constructive financial recovery program for the bank, against which we could extend the resources in question.
I don’t recall whether Valeria Hontareva or Oleksandr Pysaruk signed off on this, but I recall my conversation with Pysaruk and he said that the National Bank was prepared to review constructively this approach to bailing out the bank.
I don’t know what happened next and why the NBU backpedaled. However, since one of the parties pulled out, the experiment we wanted to attempt so as not to simply butcher this and other banks but try to find a constructive way out of this situation as long as the owner did not hide but instead came up with tangible cash failed back then, unfortunately.
Was the protocol on VAB Bank actually signed?
The protocol definitely existed. I signed it as Minister of Finance. Unfortunately, I don't have this document now. Whose signatures were affixed? Bakhmatуuk’s signature was definitely there. I am unable to say for sure whether the National Bank representatives and the Prime Minister signed it, but it seems to me that they did.
Did the failed experiment you mentioned provide in any way for the transfer of troubled assets to the bad bank or is this a different story?
No, this is a different story. As far as I recall, an idea was then floated not to liquidate VAB Bank but merge its healthy part with Ukrgasbank by providing the appropriate funding both on the part of Bakhmatуuk and on the part of the state, and additionally capitalizing Ukrgasbank so it could work with both liabilities and assets of VAB Bank.
Bakhmatуuk made the commitment to not only bring 200 million dollars but also service all loans of his companies that had accounts with the bank, obviously after some restructuring of these liabilities. If that option had materialized, we might not have lost the bank.
Most importantly, we would have acquired experience along with a specific mechanism that would show to other bank owners (those who wanted to rescue their banks in good faith) that this opportunity existed and they could use it as long as the owner did not try to escape responsibility but instead made steps to meet us halfway. To Bakhmatуuk’s credit, he constantly communicated with the Ministry of Finance, the National Bank, and the government. He did not hide anywhere but suggested various ways to rescue first VAB Bank and then Financial Initiative.
In 2014-2016, the Deposit Guarantee Fund took out close to UAH 80 billion in loans from the Ministry of Finance and the National Bank, according to the Fund’s website. Now it has to be repaid. But what is the right way to do this? To sell off debtors’ assets through the Agency for Investigation and Management of Assets or to restructure debts?
I have no answer to this. I have too little information about the asset sale methods currently used by the Deposit Guarantee Fund. But I can see that they are trying to do everything in the most transparent way possible. I know that they mobilized sound expert assistance from our western partners, who tried to teach them how to sell these assets in the most effective way.
I would like to emphasize one thing. I read the interview with Oleg Bakhmatiuk and the feedback of the law enforcement agencies and the NBU. I agree with the following proposition: it’s one thing to sell a factory or any other asset as scrap metal, as a construction site, etc., when its value is lower. It’s a different matter to try and reach an agreement with the bank owner who is willing to revive the operation of certain assets and eventually sell them for a completely different price. For example, the distillery in Ivano-Frankivsk worked and generated a certain amount of income. Today it is treated as if it were a heap of scrap metal and is appraised accordingly, although it is a fairly new facility.
I am concerned that if the nation’s largest agricultural group (Ukrlandfarming – ed.) is driven to bankruptcy now, it will follow the same scenario. We now have an agricultural group that puts out tremendous quantities of agricultural products. It is the largest player in Ukraine and abroad.
Our Deposit Guarantee Fund and law enforcement services are well (and not so well) skilled at tracking down debtors, but none of them can manage their assets as a business. I hope that tomorrow we will not be selling machinery and silos overgrown with weeds as mere scrap metal, thereby destroying a viable business.
That's why in 2014 we proceeded form the logic that if there was even the slightest chance that a certain bank could be rescued, if its owner was not in hiding but was willing to volunteer actual resources to rescue and support the bank, we had to use this chance instead of following the formal procedure that says that if the bank is in poor condition, it should be kicked out of the market.
Oleg Zinchenko, specially for RBC Ukraine