Access to transitional markets is often hindered by protectionist measures imposed by a government to enhance internally-driven competition in the sector. The Ukrainian government, as with most transitional economies, has chosen to protect “key” industries and sectors. In practical terms, this has meant that some of the sectors were lobbied for protection better than others, with the banking industry being among the former. At the moment a foreign bank may establish local representative offices, however, the latter are prohibited from rendering banking services in Ukraine and hence act merely as representatives of the foreign bank.
Protecting a key sector
By this, one may conclude that the Ukrainian banking sector is considered a key sector where foreigner investment should be barred. The National Bank of Ukraine (NBU) remains wary of foreign capital coming into the banking sector. In the absence of international instruments, the government can justify such a policy by means of reciprocity – Ukrainian banks, quite similarly, were not allowed to bank through branches in other countries.
Foreign banks may conduct their core functions in Ukraine, therefore, mainly through subsidiaries. Legislators, aware of the need for foreign capital, however, have allowed certain forms of cross-border banking, namely, foreign banks are allowed to set up representative offices in Ukraine and, after Ukraine’s accession to the WTO, branch offices. The question remains, however, whether a representative office, unlike a branch, is a direct competitor of Ukrainian banks.
A decade of integration
During the last decade many foreign banks have opened representative offices in Ukraine. Ukrainian banking laws define a representative office as a separate (in terms of location) bank unit that represents the parent bank and protects its interests. A representative office cannot carry out banking operations, which include lending and taking deposits or conducting settlements of various currency accounts.
Nevertheless, representative offices in Ukraine are actively engaged in marketing and arranging financing within the corporate and retail sectors, both on the commercial and investment sides. The NBU, except for certain procedural restrictions, permits Ukrainian companies and individuals to receive loans from foreign banks and does not require licensing or accreditation for such financial services.
A representative office of a foreign bank must be accredited by the NBU. Before a representative office can start its operations, a head office must file with the NBU the respective documents necessary for accreditation. In addition, to obtain NBU accreditation, a representative office of a bank must be registered with the statistics authorities, tax administration and social security funds.
Long list of requirements
Banking via branch offices in Ukraine is set to become possible from the date of Ukraine’s accession to the WTO, with these branches being able to carry out banking activities in Ukraine. To establish a branch in Ukraine, the foreign bank should meet a number of conditions. The home country of the foreign bank must cooperate with FATF on prevention and combating money laundering as well as financing of terrorism; the banking supervision rules in the home country must comply with the guidelines of the Basel conventions on banking supervision; the NBU and banking regulator in the home country of the foreign bank must have an effective agreement on cooperation; the branch’s own capital should be not less than EURO 10 million; and obligations of the branch before Ukrainian entities and individuals are covered by the unconditional corporate guarantee of the head office.
The above criteria seem no easier than establishing a subsidiary bank in Ukraine. The NBU has three months to issue a ruling on accreditation (more time than for registration of the new bank or representative office).
Moreover, despite the legal possibility of establishing a Ukrainian branch by foreign bank, the NBU has yet to come up with detailed procedures and new regulations. In addition, a laundry list of questions remains unanswered. For example, does a branch have the capacity (as opposed to head office) to have a license? And, if yes, should different branches of the same bank be allowed to have different licenses? Should branches be able to open outlets? Should they be allowed to have correspondence accounts with local banks? Should they be restricted in retail activities? In activities on the securities market?
According to the WTO agreement, Ukraine may be compelled to provide adequate guarantees of market penetration via branches, if other member countries prove the current regulation is insufficient. The answers to the questions above, however, are not only of procedural nature but go deeply into the substance. Branch operation rules are destined to reinvent current laws on licensing and permits as well as on legal entities in Ukraine, they must also bring a better standard for international instruments on cooperation in bank supervision.
