Institute of Global Affairs Mission Possible: The True Story of Ukraine’s Comprehensive Banking Reform and Practical Manual for Other Nations Valeria Gontareva and Yevhen Stepaniuk Be brave, be curious and determined, overcome the odds. It can be done! Stephen Hawking Mission Possible: The True Story of Ukraine’s Comprehensive Banking Reform and Practical Manual for Other Nations Valeria Gontareva and Yevhen Stepaniuk Foreword This is an extraordinary book from an extraordinary person. Valeria Gontareva, the former Governor of the National Bank of Ukraine, is well-known in global central banking and policy reform circles, and in her country is an admired reformer – except to vested and corrupt interest that her actions often targeted. She presided over the overhaul of the central bank and the financial sector in 2014-2017, at the height of the biggest crisis facing her country since independence, with a collapsed economy and war with its powerful neighbour. During her tenure, Governor Gontareva had to draw up a strategy for and implement, macroeconomic stabilisation, a radical change in monetary policy, and banking sector reform in what most considered impossible circumstances. In the process, she had to nationalise or liquidate close to half of the country’s banks, and completely restructure the central bank. A banker by training, she also proved herself to be a skilful politician, working with alliances at home and abroad to help reforms succeed. This book is an insightful, candid and passionate account of her approach and policy experience. She has called it a “Practical Manual” for reforms – it is that but also much more: a historical record of reforms against all odds. It also testifies to her true leadership and deep dedication to her country and fellow citizens, despite risks to her own and her family’s safety. Governor Gontareva recently survived what was most likely an attempt on her life, and has defied several acts of intimidation to write this compelling book. For that we are most grateful. The book was written in collaboration with Yevhen Stepaniuk, while Governor Gontareva was in residence at the London School of Economics and Political Science, where she is a Senior Policy Fellow at the Institute of Global Affairs at the School of Public Policy. We are fortunate to have her participate in our Global Policy Lab, where she is well-placed to help the next generation of leaders and policy makers launch their countries’ hard road to reform. Professor Erik Berglof, Director, LSE Institute of Global Affairs London, May 2020 2 Glossary of Acronyms ALCO Assets and Liabilities Management Committee AMC Asset Management Company AML / CFT Anti-Money Laundering and Countering Financing of Terrorism API Application Programming Interface AQR Asset Quality Review ARC Asset Resolution Company ARC Annual Report Competition ATM Automatic Teller Machine AUD Australian Dollar B-1 Board -1 Level BCBS Basel Committee on Banking Supervision BCP Business Continuity Planning BEPS Base Erosion and Profit Shifting BIS Bank for International Settlements BOP Balance of Payments BRRD Bank Recovery and Resolution Directive CAGR Compound Annual Growth Rate CAMELSO Composite Rating of Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to Market Risk, Operational Risk CAR Capital Adequacy Ratio CB Central Bank CBDC Central Bank Digital Currency CCR Central Credit Registry CD Certificate of Deposit CEE Central and Eastern Europe CEO Chief Executive Officer CFC Controlled Foreign Company CFO Chief Financial Officer CHF Swiss Franc CMU Cabinet of Ministers of Ukraine CNY Chinese Yuan COREP Common Reporting CPI Consumer Price Index CRA Comprehensive Risk Assessment CRR/CRD IV Capital Requirements Regulation and Directive IV CRS Common Reporting Standard DGF Deposit Guarantee Fund EAD Exposure at Default EBITDA Earnings before Interest, Taxes, Depreciation and Amortization EBRD European Bank for Reconstruction and Development ECB European Central Bank EFF Extended Fund Facility EIB European Investment Bank ELA Emergency Liquidity Assistance ESRB European Systemic Risk Board EU European Union EUR Euro 3 EWS Early Warning System FATCA Foreign Account Tax Compliance Act FATF Financial Action Task Force FCY Foreign Currency FDI Foreign Direct Investment FINREP Financial Reporting FinTech Financial Technology QPM Quarterly Projection Model FSC Financial Stability Council FX Foreign Exchange GAAR General Anti-Abuse Rules GBP British Pound GDP Gross Domestic Product GFC Global Financial Crisis G-SIB Global Systemically Important Bank IAIS International Association of Insurance Supervisors IBAN International Bank Account Number ICSD International Central Securities Depository IFC International Finance Corporation IFI International Financial Institution IFRS International Financial Reporting Standard IMF International Monetary Fund INSOL International Federation of National Associations of Accountants and Lawyers IOSCO International Organization of Securities Commissions IPO Initial Public Offering IR Interest Rate IT Inflation Targeting JPY Japanese Yen KYC Know Your Customer LCR Liquidity Cover Ratio LCY Local Currency LGD Loss Given Default M&A Mergers and Acquisitions MAP Mutual Agreement Procedure MFA Macrofinancial Assistance MLI Multilateral Instrument (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) MoF Ministry of Finance MONEYVAL Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism MPC Monetary Policy Committee M-t-M Mark-to-Market NBU National Bank of Ukraine NFSC National Financial Services Commission NDA Net Domestic Assets NIR Net International Assets NPL Non-Performing Loan NRC National Reform Council NSFR Net Stable Funding Ratio 4 OECD Organization for Economic Co-operation and Development P&L Profit and Loss Statement P2P Peer-to-Peer PD Probability of Default PEP Politically Exposed Person PLZ Polish Złoty POS Point of Sale PSD2 Payment Services Directive 2 QE Quantitative Easing RAMP Reserves Advisory and Management Partnership RCSA Risk and Control Self-Assessment REER Real Effective Exchange Rate RIT Reforms Implementation Toolkit RPL Related Party Lending RTGS Real-Time Gross Settlement S&P Standard & Poor's SBA Stand-by Arrangement SDR Special Drawing Rights SEP System of Electronic Payments SEPA Single Euro Payments Area SIB Systemically Important Bank SME Small and Medium-sized Enterprises SOB State-Owned Bank SOE State-Owned Enterprise SPV Special Purpose Vehicle SREP Supervisory Review and Evaluation Process ST Stress-Testing TA Technical Assistance TLAC Total Loss-Absorbing Capacity UAH Ukrainian Hryvnia UBO Ultimate Beneficial Owner UBPR Uniform Bank Performance Report UK United Kingdom URA Ukrainian Reform Architecture USAID United States Agency for International Development USD, US$ United States Dollar VAT Value Added Tax XML Extensible Markup Language 5 Outline Introduction ........................................................................................................................... 8 Chapter 1. The Pre-Reform Environment ............................................................................ 10 a) Macroeconomic Recession .......................................................................................... 10 b) Public Finance: Debt and Deficit Explosion ................................................................. 14 c) Ineffective Banking Sector ........................................................................................... 15 Chapter 2. Our Rapid Response Measures .......................................................................... 18 a) “Stop fiscal dominance!” ............................................................................................. 19 b) Contingency planning .................................................................................................. 22 Chapter 3. Comprehensive Banking Reform: Where to begin? What to do first? .............. 26 a) The Comprehensive Program for the Development of the Financial Sector 2020 ..... 27 b) Reform Infrastructure and Toolkit: National Reform Council, Reform Steering Committee ....................................................................................................................... 30 c) Financial Stability Council ............................................................................................ 33 d) Coordination with donors ............................................................................................ 34 Chapter 4. The Necessary Legislative Prerequisites ............................................................ 35 Chapter 5. The first priority: Macroeconomic stabilization ................................................. 38 a) In search of equilibrium ............................................................................................... 38 b) Capital flow measures, limited deposit restrictions .................................................... 43 Chapter 6. New monetary policy framework ...................................................................... 47 a) Monetary policy decision-making bodies .................................................................... 56 b) Communications on monetary policy issues ............................................................... 59 c) Analytical capacity, data mining, research, and reporting .......................................... 59 d) Open market operations, available