Implementation of the “bail-in” mechanism in the banking system of Ukraine

  • Received August 22, 2017;
    Accepted September 29, 2017;
    Published October 26, 2017
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  • Article Info
    Volume 12 2017, Issue #3, pp. 269-282
  • Cited by
    11 articles

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One of the important tasks of the National Bank of Ukraine is to implement the Directive 2014/59/EU namely to introduce the “bail-in” mechanism, which will enable to resolve insolvency of banks or high probability of its occurrence at the expense of internal sources of banks in order to improve the Ukrainian banking system functioning and adapt it to the requirements and standards of the European Union. The foreign experience of the “bail-in” implementation shows that central banks succeeded in restructuring the balance sheets of banks and significantly reduced the risks of their activities. Thus, the purpose of the study is to substantiate the expediency of the “bail-in” mechanism introduction in banking system of Ukraine. The essence of the “bail-in” mechanism is the involvement of shareholders and lenders of the bank in order to restore its solvency by offsetting shareholders’ equity, subordinated debt, and/or converting/writing off other long-term unsecured and unprovided liabilities in a subordinated debt or shares of the bank. In the process of scientific research, using the comparative method, the method of analogies and methods of logical generalization and scientific abstraction, the structure of the “bail-in” mechanism is determined, which consists of methods (conversion of liabilities into capital, liabilities write-off, capital write-off), provision (normative and legal, financial, organizational and institutional, technical and technological, informational) and levers (incentives, sanctions). Using the expert estimation method, it is proposed to evaluate the effectiveness of the “bail-in” mechanism by comparing the quality of the assets of the bank prior to its implementation and after the completion of the action. The results of the study show that, firstly, the implementation of the “bail-in” mechanism in Ukraine will enable the National Bank of Ukraine to interfere with the activities of banks at an early stage of the problems and to take all necessary measures to restore their solvency. Secondly, the “bail-in” mechanism implementation in Ukraine will increase banks’ resilience to shock, crisis and contribute to long-term financial stability.

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    • Figure 1. The structure of the “bail-in” mechanism
    • Figure 2. Algorithm for implementation of the “bail-in” mechanism in Ukraine under the condition of the Banks Financing Fund creation
    • Table 1. Advantages and disadvantages of implementing the “bail-in” mechanism