THE DEPOSIT GUARANTEE FUND OF UKRAINE: TOWARDS EU STANDARDS OF RIGHTS PROTECTION

Abstract

An effective deposit insurance system is commonly considered the strongest instrument for increasing confidence in banking systems, as well as for encouraging private investments in banking services. In developing relevant legislation and institutions in line with EU standards, Ukraine will ensure that its deposit guarantee system can be integrated with that of the EU. In light of the relevant legislation, we examine the EU’s deposit guarantee system in general and with regard to its particular characteristics, namely: insured entity, compensation amount, legal terminology, and financing. Then, we compare those characteristics to those of Ukraine and assess the necessity and priority of their development. As a result, we first emphasise that individual entrepreneurs and legal entities, as well as individual entities, must be insured under the Deposit Guarantee Fund. Second, we argue that the current state compensation amount for deposits in case of bank insolvency is insufficient and suggest that it must be revised and increased. Third, we draw attention to the fact that Ukrainian banking and deposit guarantee legislation must be revised and integrated with relevant European legal terminology. Finally, we also analysed the particular aspects of financing for the European deposit guarantee system, especially the various means of investing free funds in the deposit guarantee system, which we thought could be useful to implement in Ukraine. Our results suggest distinct legislative and other empirical measures needed to improve the Ukrainian deposit guarantee system and generally consolidate it with that of the EU.

Background: The deposit insurance system provides insurance for the deposits of individuals who have entrusted their money to banks. In the event of the insolvency of a banking institution, the deposit insurance system, to a greater or lesser extent, guarantees the payment of deposits to that institution’s clients and protects the rights of other creditors involved in the insolvency proceedings. As a result of the banking sector crisis in Ukraine during 2014-2017, almost 100 banks were classified as insolvent. Therefore, the Deposit Guarantee Fund of individuals was subject to a huge burden, which exposed several problematic issues related to the protection of depositors’ rights.

Methods: To obtain reliable and valid conclusions, the author used comparative and analytical methods of research. These methods consist of the analysis and comparison of the provisions of EU and Ukrainian legislation in the field of the protection of depositors’ rights.

Results and Conclusions: The Ukrainian deposit guarantee system has significant differences from the relevant European system. First and foremost, this concerns the amount of guaranteed compensation for deposits in Ukraine. The author concludes that this deposit coverage amount was not reviewed during the period from 2012 to 2022, which does not contribute to the interest of depositors in keeping money in banking institutions. However, on 1 April 2022, during the period of martial law, Ukraine adopted Law No. 2180-IX ‘On Amendments to Certain Laws of Ukraine on Ensuring the Stability of the Deposit Guarantee System for Individuals’, which provides a full guarantee of individuals’ deposits during martial law and three months after its termination, as well as increases the guaranteed deposit compensation to UAH 600,000. These changes will have positive consequences for depositors, but the author points out that in the context of these legislative changes, the state should provide support to the Deposit Guarantee Fund by writing off interest arrears to the Ukrainian Ministry of Finance, which has emerged due to the banking crisis in 2014-2017.

In addition, to preserve the liquidity of banks’ assets, the author proposes to ensure that the Fund starts preparing banks for the management of their assets by evaluating and monitoring their status. Furthermore, the author emphasises the need for the harmonisation of the Ukrainian banking legislation with the requirements of Directives 2014/49/EU and 2014/59/EU. For this purpose, the guaranteed amount of reimbursement should be gradually increased to the equivalent of EUR 100,000, and guarantees should be extended to depositors who are legal entities. The relevant legislation must also be amended so that its terminology corresponds with that of the EU, the Deposit Guarantee Fund participants must be included in other credit institutions, and the Deposit Guarantee Fund must guarantee legal entities’ deposits.