Nationalization of PrivatBank: A New Era for Ukraine

The nationalization of PrivatBank marked a significant turning point in Ukraine's financial landscape. On December 18, 2016, the bank was nationalized by the Ukrainian government due to concerns over its stability and potential collapse.

This decision was made after the bank's owner, Ihor Kolomoyskyi, was removed from his position as governor of Dnipropetrovsk Oblast. The bank's assets were subsequently transferred to the Ukrainian state, with the National Bank of Ukraine taking control.

The nationalization of PrivatBank was a bold move by the Ukrainian government to stabilize the country's financial system.

PrivatBank was declared insolvent by Ukraine's National Bank in 2016 due to high capital losses.

The bank was subsequently nationalized, a decision that would be the subject of a seven-year court battle.

PrivatBank is Ukraine's largest bank in terms of assets, a fact that underscores the significance of the nationalization decision.

The bank was formerly owned by oligarch Ihor Kolomoisky and Hennadii Boholiubov, who would later face allegations of misappropriating at least $600 million from the bank's funds.

PrivatBank was declared insolvent in 2016, a move that was made necessary by the bank's high capital losses.

The nationalization of PrivatBank was a major decision that would have far-reaching implications for the bank and its former owners.

Nationalization of PrivatBank can have several benefits. State-owned banks can save those "too big to fail" and ensure more even distribution of loans during business cycles, especially in periods of economic downturn (Bertay et al. 2015).

Privately owned banks tend to lend to businesses more procyclically than state-owned banks, which can exacerbate economic crises. Lending by state-owned banks is less procyclical or even countercyclical, contributing to greater stability of the financial system.

However, there's a question of whether the loans are effectively distributed. Do they reach small and medium enterprises or larger politically favored enterprises that have better access to external financing anyway? (Bertay et al. 2012).

Nationalization of PrivatBank brings to mind the drawbacks and risks of state-owned banks. Politically induced lending is a major concern, where state-owned banks are used to favor the incumbent authorities and their party allies.

Studies have shown that state-owned banks in Turkey, for instance, systemically act in the interest of the incumbent authorities, providing loans to their party allies around local elections. This behavior is not seen in privately owned banks, which are driven by market-based incentives.

State-bank lending is often less effective and more politically motivated, leading to lower economic growth. Countries with more state ownership in the banking sector tend to have less developed economic and financial systems.

Ukraine's history of using state-owned banks to pursue narrow political interests is a case in point. Oschadbank, for example, had numerous problems relating to repayment of loans issued to politically affiliated businesses.

The nationalization of PrivatBank has had significant results and impact. The bank's credit ratings were raised by S&P from SD to CCC+/C, with a stable outlook, and by Moody's from Caa3 to Caa2.

In April 2017, S&P reported an increase in credit ratings of PrivatBank, indicating a positive change in the bank's financial situation. The bank's rating outlook was also changed to "stable", suggesting a more secure future.

A lawsuit was filed by PrivatBank against Kolomoisky and Boholiubov, as well as several of their companies, in December 2017. The court issued a ruling for the worldwide seizure of their assets, worth over $2.5 billion.

The court also required Kolomoisky and Boholiubov to disclose information about their assets to a limited circle of people involved in the lawsuit. This move aimed to prevent them from hiding their assets and potentially regaining control of the bank.

A new banking law was approved by Ukraine's parliament in April 2020, designed to prevent Kolomoisky and Boholiubov from regaining control of PrivatBank. This law aimed to strengthen the bank's ownership structure and prevent any potential takeover.

In July 2022, the Ukrainian national bank announced that the Supreme Court had ruled the nationalization was valid. This decision confirmed the legitimacy of the nationalization process and ensured the bank's continued ownership by the state.

PrivatBank was founded in 1992 by co-founders Ihor Kolomoiskyi and Hennadii Boholiubov, who controlled 92% of the bank's shares before its nationalization.

The bank had become the largest private bank in Ukraine by the time of its nationalization at the end of 2016.

More than 22 million customers had opened their accounts in the bank, and it served about 60% of transactions and half of payment cards issued in Ukraine.

The National Bank of Ukraine recorded serious problems with the capital adequacy ratio, the loan portfolio, and the institution's compliance with the standards.

The bank's shareholders agreed to transform the loan portfolio in February 2016, but failed to meet the transformation deadline and fully implement it.

This led to a set of measures for reforming the financial sector of Ukraine, including a goal to create a financial system able to redistribute financial resources efficiently in the economy.

State-owned banks can come into being for various reasons. Nationalizing private banks is often done to save the economy and financial system during economic and financial crises, as seen in Ukraine where the share of state-owned banks grew during such times.

Governments may nationalize systemically important banks, like Latvia's Parex Banka, to prevent their problems from causing harm to the entire economy or financial system. This was also the case with Northern Rock and Bradford&Bingley in the UK.

The global financial crisis of 2008-09 prompted many governments to take similar action, nationalizing private banks to prevent a larger crisis. Governments may also buy into regular banks to save them from bankruptcy, as the Ukrainian government did with Ukrgasbank, Rodovid Bank, and the Bank Kyiv.

In some cases, governments establish state-owned banks to implement economic development goals that don't receive financing from private banks, such as investments in technology projects or financing state infrastructure projects.

PrivatBank was founded in 1992 by co-founders Ihor Kolomoiskyi and Hennadii Boholiubov, who controlled 92% of the bank's shares before its nationalization.

The bank's co-founders were also co-founders of the financial and industrial Privat Group.

By the end of 2016, PrivatBank had become the largest private bank in Ukraine, serving about 60% of transactions and half of payment cards issued in the country.

Over 22 million customers had opened their accounts in the bank by then.

The National Bank of Ukraine recorded serious problems with the capital adequacy ratio, the loan portfolio, and the institution's compliance with the standards.

In February 2016, the bank's shareholders agreed to transform the loan portfolio, but the ex-owners failed to meet the transformation deadline.

The National Council of Reforms identified eighteen priority reform areas, including a set of measures for reforming the financial sector of Ukraine, in February 2015.

The Programme aimed to create a financial system able to redistribute financial resources efficiently in the economy based on the development of a full-fledged competitive environment according to the EU standards.