The textbook “Banking Law” is published as a part of the Oregon-Lviv University Partnership Program. This Partnership,funded by the U.S. Department; of State’s Bureau of Educational and Cultural Affairs, brings educators from the University of Oregon, Lviv National University, and the Lviv Commercial Academy to each others institutions, links them together, electronically, and supports mutual work, so that they can all learn from one another. Part of that; work is a publishing program for textbooks in Ukraine that, use new and innovative approaches to teaching.
In 1991 Ukraine started to change its political and economic systems to ones of democracy and a market economy. The current generation inherited a destroyed economy, a difficult and complicated political situation and relationships, corruption and inflation. We started our new country and history with huge debts, both internal and external. The collapse of the Soviet) Union caused the disappearance of the private savings of millions of people. In a few days people lost everything they had in banking accounts and they lost their, trust in government as well. Government and the banking system could not; count on a high percentage of private deposits. There were two reasons for this. First of all, the private incomes of Ukrainian people were low because of unemployment) and inflation. Secondly,people no longer, believed in the banking system.
At the present time economic and political reforms are changing life in Ukraine substantially. During Soviet times the public sector accounted for virtually all of the Gross National Product (GNP). Now the banking system has undergone tremendous change, moving from government-owned banks and total government control of money and finance to the current system in which there are both government and private banks. Gradually new regulation is replacing the old.
The evolution of the national banking system in Ukraine started in March 1991, after, adoption of the law of Ukraine “On Banks and Banking Activity” by our, Parliament. The Ukrainian banking system is a two-tier structure consisting of the National Bank of Ukraine and banks of various types and forms of ownership.
The National bank; of Ukraine serves as the country’s central bank which pursues uniform state monetary policy to ensure the national currency stability.
Commercial banks are formed as joint stock companies or as companies on equal footing. The range of banks activities includes taking of deposits of enterprises,institutions and households; crediting of economic entities and households; investments in securities; formation of cash balance and reserves as well as other assets; cash and settlement servicing of the economy; foreign exchange operations; and other related services. Starting from January 1,1998, the banking system of Ukraine adopted international accounting and statistics standards.
Today we can say that the banking system of independent Ukrainian state has been formed. According to the data from March 2002,189 banks have been registered in Ukraine. 29 banks out of this number have foreign capital share (6 banks have in Ukraine. 29 banks out of this number have foreign capital share (6 banks have 100% foreign capital). However,the banking law is still in the process of development. The culmination of banking reform was the adoption of the law of Ukraine “On Banks and Banking Activity” in December 2000 and adjustment of the national legislation to its norms. Furthermore,during 2001-2002 the National Bank; of Ukraine has developed and adopted a whole set of legal acts, in particular on banking supervision and application of measures against violation ofbanking legislation,measures against money laundering, procedure of establishing and registration ofbanks, licensing ofbanking transactions, and other matters. Some refinements to this legislation have also been promulgated as regulations by the NBU on various aspects of certain banking transactions.
Since Ukraine became independent several textbooks on Banking Law have been published, but the changeability ofbanking legislation is making them out; of date rather quickly. The demand for a textbook on banking law is especially urgent now when laws of Ukraine “On the National Bank of Ukraine” and “On Banks and Banking Activity” have been adopted. In addition to covering this legislation, this is the first textbook in Ukraine where the administrative regulations of applicable legislation have been taken into consideration.
The author aims at combining theoretical analysis with practical experience. Such a combination could be defined as a main goal of teaching — the combination of principles oflaw, theory of law and practice. This has been accomplished with the following methods:
- A range of concepts and categories of legislation are defined, that is: banking activity, banks and financial institutions, their types, characteristics oflegal status; legal grounds for banking transactions and providing of banking services; characteristics of legal status of the National Bank of Ukraine and its tasks, functions, methods of regulation of banking activity and money circulation; the privacy of bank deposits.
- The author has tried to teach the topics of a banking law course in a novel way. The focus is on elucidating the practical aspects of banking transactions. Therefore, one of the important tasks of teaching is to concentrate students’ attention on specific problems and also to focus them on developing their own conclusions and judgements. In this regard each chapter has several categories of questions. Checking tasks allow to make self-analyses or check; how well the material of the given topic was understood. Discussion topics are proposed that; can be used to talk about questions which are not clearly regulated by the current statutory or judicially created law of Ukraine. The relationships in the sphere of banking activity are extremely diverse and they depend upon each group of subjects,time,place,and the like. In addition,they are very changeable. Thus the suggested method of treating the subject demonstrates the wide range of banking legal relationships and demands that; the student; approaches solving problems analytically and refers to a concrete legislative or legal act.
- For the first time in Ukraine a textbook on banking law contains excerpts from court cases, explanations and review letters from the High Commercial Court of Ukraine. This stimulates students’ interest; in the course on banking law since practical aspects of solving economic disputes with the assistance of banks demonstrate the application oflaw and legal logic ofa judge, a legal adviser, etc.
The textbook consists of two parts: General and Special. The General Part; consists of two Sections:
- Ukrainian Banking Law and Banking Legislation (Chapters 1 and 2)
- Ukrainian Banking System (Chapters 3,4, and 5)
The General Part includes theoretical aspects of banking law and banking activity
The General Part; includes theoretical aspects of banking law and banking activity as well as these main questions: bank and financial institutions, banking transactions, banking structure, legal status ofthe National Bank ofUkraine, and banking supervision in Ukraine.
The Special Part consists of two Sections as well:
- Legal regulation of banking transactions (Chapters 6, 7, 8, 9, and 10)
- American Banking Law compared to Ukrainian (Chapter, 11)
The Special Part; covers banking transactions,in particular, banking accounts,payment transactions, credit; relations, and currency transactions.
There are 11 chapters. Each chapter includes:
- legislative and normative-legal regulations of actual relations © definitions
- checking tasks,such as questions to the discussions with a selection of legislation,
- normative-legal acts, and literature
- materials from court practice in the chapters of the Special Part In the national legal traditions banking law is divided into General and Special Parts. The General Part includes general regulations that are typical and absolute in the condition of emerging or functioning of any banking legal relations. These are the organizing and functioning of the banking system; legal status, functions and responsibilities of NBU (the highest level of banking system in Ukraine); definitions, types of banks; procedures of their establishing, registration and licensing of banking activity; reasons and procedures of termination of bank activities; banking supervision and control,regulation of banking activity; and the protection of rights and interests of banks and their clients.
The Special Part includes groups of legal norms that regulate relations in the sphere of banking activity and according to their, uniformity comprise separate institutions: the institution of banking accounts; the institution of banking credit; payment relations; currency relations; and so on.
The General Part of the textbook discussed banking law and the Ukrainian banking system.
The first chapter ofthe textbook “Banking Law ofUkraine: General Characteristics and Peculiarities. Issues of the General Theory” explains the subject of banking law as a totality of social relations which develops on the basis of implementation of banking transactions and providing of banking services by authorized legal subjects — banks and financial institutions, and also by the National Bank ofUkraine (NBU) (which is granted by the Constitution and applicable legislation of Ukraine exclusive functions in the sphere of money circulation, credit policy, providing functioning and development of banking system). It is necessary to consider that banking is a specialised business activity, giving rise to financial and credit; policy of the state that requires the application of special methods of regulation by the central bank.
Banking law is a complex legal institution that consists of norms of constitutional, administrative, civil and other branches of law. The principles of banking law are defined in this chapter as well. There are general principles, such as supremacy oflaw, the principle of priority of international legal norms, freedom of economic activity, freedom of agreements and others. Special banking principles are the following: the principle of combination in banking law of private interests of banks and of their clients and economic public interest; the principle of monopoly of the issuance of money and organizing of its circulation; the principle of the independence of NBU from other bodies of governmental power; the principle of economic independence
the National Bank; the principle of separation of governmental finances and reserves of NBU; the principle of privacy of bank deposits, term of deposits and payment in the process of banking activity; the principle of deposit guarantees in banks; and the principle of preventing of the legalization of money acquired illegally.
In the second chapter “Essentials of and Grounds for Banking Activity” the book discusses the concept and content of banking activity. The chapter also discusses the regulatory activity of the National Bank of Ukraine, which is aimed at the development of the banking system of the country; implementation of the monetary and credit policy of the state; the implementation of banking transactions and the providing of banking services; and meeting the demands of society in the market of banking services. The content of financial activity and the correlation of these ideas is discussed. Notions, types and reasons for, banking transactions, and also the providing ofbanking services are discussed. This chapter discusses legal requirements for banking services, namely the availability of a license or special permission.
In the second section of the textbook the legal foundations of the organization and functioning of the banking system of Ukraine are covered.
The third chapter “Legal Regulation of Banking Activity in Ukraine” draws attention to the fact that banks do not function in isolation from each other, but are interrelated and are ruled by unified principles and methods of legal regulation. Joining all banks in one system as an independent) structure requires certain organizing requirements,which means:
- uniformity of legal regulation of banking activity in the state
- creating a uniform mechanism for all banks regarding the movement of
- bank reserves,regulated by the National Bank of Ukraine
- precise legal delimitation of rights and duties of each branch of the system,
- in particular non-banking financial institutions
- regulation of inter-banking relations and the system of correspondence ties.
This chapter also defines the concept and legal status of a bank. A bank is defined in accordance with the functions it performs, in particular the function of a financial mediator. Also the distinctions between banks and other financial institutions are provided. Special attention is paid to the legal organizing structure of a bank; the legal status of its representatives and branches; the bodies of bank management; and the power, functions and responsibilities of officials. In addition, the following questions are discussed: who can be a participant of a bank, what amount of money is required to form a bank’s required capital, under what circumstances can the National Bank of Ukraine refuse to register a bank, etc. The textbook defines the main stages of the process of a bank’s liquidation, the termination of a bank’s activity by its reorganization, and the sequence of satisfaction of creditors’ demands.
The fourth chapter “Legal Status of the National Bank of Ukraine” deals with the country’s central bank. Today a central bank is a key element of the financial and credit system of any developed country. The central bank acts as a mediator of official financial policy. The characteristic feature of the legal status of the National Bank of Ukraine is set forth in the Constitution of Ukraine, where the major and exclusive function of the NBU is defined as the guarantee of stability of the monetary unit of Ukraine. The bodies of management of the National Bank and its relationships with the bodies of the state power are analyzed in the textbook.
The NBU has characteristic features of the bodies of executive power, but there is one substantial distinction — it does not belong to the system of bodies governed by the Cabinet of Ministers and is not subject to it, being subordinated instead to the President and the Supreme Council of Ukraine. One additional characteristic feature of the NBU is that it is both an autonomous part of the governmental structure and an economically independent legal entity which has its own statutory capital, has its own rights and responsibilities, and may be a plaintiff: and a defendant in the court. Thus, the central bank could have responsibility which, according to the legislation of Ukraine, is the direct consequence of the civil and legal relationships and also of relationships of a public nature, where one of the sides is the state in the person of governmental bodies.
The fifth chapter “Legal Regulation of Banking Supervision” is dedicated to the supervisory activity of the National Bank of Ukraine. Its jurisdiction covers all banks, their subdivisions, affiliated banks on the territory of Ukraine and abroad, foreign banks in Ukraine, and also other juridical and physical persons with regard to compliance with legislation in banking activity. If the applicable legislation and normative-legal deeds of NBU are violated or if the policy of a bank; is risky, NBU can impose appropriate sanctions. Sanctions are used on the following grounds: the results of checking inspections (planned and unplanned) of activity of banks or their branches, the results of analysis (using statistical accounts, monthly and daily balances), or results of an audit of compliance with the requirements of banking legislation.
The main principles formulated in the document; “Minimal Standards On Supervision of the International Banking Groups and Their Trans boundary Institutions” which was adopted by the Basel Committee in 1992, are given in the textbook.
In the context of defining public and private interests the issue of guaranteeing people’s accounts arises. The trust of people in the banking system is not only the concern of banks, but; of the state as well. The law of Ukraine “On Banks and Banking Activity” says that the state guarantees the deposits of physical persons in Oshchadnyi Bank of Ukraine and deposits in other, banks is guaranteed by procedures of applicable legislation. The law of Ukraine of September, 20,2001,“On the Foundation of Guaranteeing of Deposits of Physical Persons,” provides for the creation of a special state institution — a “Foundation” that fulfils the functions of state management for guaranteeing of deposits. According to the law all banks registered in the Governmental registrar of banks and licensed by NBU for banking transactions are the participants of this Foundation and are required to pay revenues to the Foundation. The Foundation guarantees reimbursement of deposits to every depositor of the banks — participants of the Foundation.
One more important issue which is discussed in the textbook is the privacy of bank deposits. According to Ukrainian legislation private information includes:
- the state of accounts of clients, including the state of corresponding accounts of banks in NBU
- a client’s concluded agreements as a result of transactions conducted for, the benefit or by the order of a client
- the financial state of a client
- the systems of protection of banks and their clients
- information about a client, such as its legal structure, officers, or directions of
- financial reports of a bank, except those to be published
- codes used by banks for the protection of information
- commercial activity of clients or commercial information about any projects, inventions, samples of production, etc.
Information, about, banks, or, their, clients, which, is, gathered , during, banking supervision, is, considered , to, be, banking, private, information, as, well.
However, one should consider the fact that Ukrainian legislation concerning banking privacy still is rather contradictory today. This refers, for instance, to the duty of banks to provide information to legal authorities about; the identification of persons who perform large and/or dubious transactions. Such duties are set in the laws of Ukraine “On Banks and Banking Activity”, and “On Financial Services and State Regulation on the Market of Financial Services”. Furthermore,a resolution of the Cabinet of Ministers of Ukraine and NBU approving the so-called “Forty recommendations” of the group for developing financial measures against money laundering (FATF) appears to be opposite to the Ukrainian legislation on privacy of banking information. According to these laws the access to private information is allowed to:
- a client of a bank
- a court (by a written request or its resolution)
Prosecutor’s bodies, the Security Service of Ukraine, the Ministry of Home Affairs of Ukraine (by their written request,concerning taxation issues or currency control of accounts of a legal or physical persons — the subjects of enterprising activity — for the given period of time)
In the Special part of7 the textbook each chapter covers a separate aspect of7 legal regulation of banking transactions.
In the sixth chapter, “Legal Regulation of Banking Accounts,” the legal character of banking accounts is defined, and the role of a bank as a financial mediator is emphasized. An important aspect of an agreement) to establish a bank account is that it combines both public and private legal elements. The deposit transaction is a private agreement between a bank and a client, but public legislation imposes a number of limitations,instructions or prohibitions with regard to accounts. For instance,a necessary precondition for opening of an account is including the account) in a taxation register. In turn,banks have an obligation to warn taxation bodies and NBU about closing down of a client’s account. In addition, Ukrainian legislation obliges corresponding organizations of some branches of the national economy to invest money in a bank or to receive the money in terms of credits for special purposes.
Enterprises and individual owners of business must keep their funds in banking institutions according to Ukrainian legislation. Cash they receive from their own current accounts should be spent; on subjects clearly stated in a cheque.
Applicable Ukrainian legislation defines current) and deposit) accounts. The procedure of the opening of banking accounts and peculiarities of their usage in every case is determined by the NBU. All that depends on the following:
- the, aim of the usage of the money in an account
- the type of a client
- the type of the currency of an account
The seventh chapter “Legal Support of Payment Transactions in Ukraine” deals with the issue of cash circulation and cash operations of banks. All enterprises and businessmen that have current accounts in banks keep their money on a contractual basis. Cash, which comes to the pay-desks of enterprises, has to be transferred to bank accounts. When one receives the cash from a current account the money cheque has to contain the purpose of the received sum and the essence of the transaction. Moreover, a bank is to identify persons — clients — who perform large or dubious transactions and to inform legal bodies about them. According to the resolution of the Cabinet of Ministers of Ukraine “On Definition of Criteria of Attributing the Financial Transactions as Dubious and Uncommon” the criteria of such definition of transactions are the following:
- sharp increase of finance on the account of a client, such money is received in cash form and are to be transferred to a person who is not connected with a client by agreement relationships
- charging during one day extra money from several participants of the market of financial services to the opened by a client;
- account; in a bank,this money is transferred into cash during one working day or transferred to the other, account, thus in the end given, account, contains, no money or the sum is substantially, decreased
- writing off: or charging extra finance in cash that are not connected with a character of activity of the juridical person to an account of this very juridical person © realization of transactions on the conditions that clearings of them exceed the equivalent of 50,000 EURO or cash accounts exceed the equivalent of 10,000 EURO (by the official rate of exchange of hryvna (Ukrainian currency) to foreign currency determined by NBU)
The eighth chapter “Legal Foundations of Realization of Clearings in the National Currency of Ukraine” maintains that the clients of a bank in order to realize their payment independently choose payment; tools (with the exception of memorial order) and define them during conclusion of an agreement. There are the following payment tools:
- payment commission
- payment demand-commission
- payment demand
- account check
- letter of credit
- banking payment cards
The ninth chapter “Legal Regulation of Credit Relationships” defines “credit” as an assignment of money from a bank or a credit institution to a borrower in an amount and on conditions stipulated in the credit agreement. A borrower is bound to return the borrowed sum and to pay interest. A bank or credit institution could be a creditor. The subject of a loan is money only. According to the law “On Banks and Banking Activity” the following transactions are considered to be credit ones:
- placing of circulating money on one’s own name,on one’s own conditions and at one’s own risk
- organizing of selling and buying of securities on behalf: of a customer
- handling transactions on the securities market in one’s own name
- providing guarantees and other obligations from third persons to be fulfilled with money
- acquiring the right to demand carrying out of obligations for payment for goods or services which were provided, factoring operations
All of these operations are carried out on the basis of a license from the National Bank of Ukraine.
The most risky banking transactions are credit ones. They are also regulated by the law “On Banks and Banking Activity”. Banks independently define the order of execution of credit operations, establishment of interest percentages and the rate of commissions, but; they are controlled in some sense by the state: if giving to a borrower credit which exceeds 10% of the capital of a bank (big credits), a bank has to inform NBU; besides, no big credit can exceed 25% of the assets of a bank; general amount of, credits, can, not, exceed , eightfold , amount, of, the, assets, of, a, bank.
Also conditions of credit stipulated by Ukrainian legislation are discussed in this chapter, in particular: conditions of providing and grounds for refusal to extend credit, order, of repaying of credit and its interest, and responsibility of participants for credit obligations. In addition, modes of credit guaranteeing are analyzed, namely guarantee or insurance.
The content of currency regulation in Ukraine is discussed in the tenth chapter, “Legal Regulation of Currency Operations”. Such regulation is fulfilled through normative legal acts which determine the conduct of transactions on the currency market of Ukraine, observance of external debts limit of Ukraine, licensing of currency transactions,establishment) of modes of determination and utilization of foreign currencies expressed in currency of Ukraine (exchange rates),the exchange rate of foreign currency, etc. Specially emphasized is the fact that the main body of currency regulation in Ukraine is the National Bank of Ukraine. The legal foundation of currency control in Ukraine and responsibility for the violation of currency legislation of Ukraine are also discussed.
Section 4 of the textbook compares banking legislation in Ukraine to that in the USA. US banking law is briefly analyzed in the eleventh chapter “Legal Regulation of Banking Activity in the USA.” Attention is paid to peculiar features of the American banking system which are caused by the historical development of the country. At the same time one could notice some similarities caused by unification of principles of banking activity and standardization. The chapter discusses the content of banking activity, classification ofbanks, spectrum ofbanking services, and principles ofbanking supervision.
The special nature of US banking institutions is that they depend on a great number of regulative bodies and have a duty to take into consideration not only the law of the Federal Government (Federal legislation), but the laws of the states. Law omissions or collisions are handled either by banking regulatory bodies or by courts. The principle of banking system dualism in the USA consists of a double system of subordination .registration of banks and regulation of banking activity. One peculiarity of the US banking system is the right of banks to choose their subordination to the Federal Government or to the government of a state. It would be interesting for Ukrainian students to get acquainted with the organization of the upper level of the US banking system — the Federal Reserve System of the USA -- in particular with its structure .division of competence between the Federal Deposit Insurance Corporation and the Controller of the Currency; the independence of the US central bank from other bodies of state power; and the system of deposit guarantees in US banking institutions. The classification of banks is rather different too. There are national banks, banks of states, and commercial banks.
The textbook also discusses the legal status of the US central bank system, the legal status of banks, peculiarities of their creation and functioning and of banking controls. Also one can find some information on the characteristics of particular banking transactions, characteristics of particular banking accounts and peculiarities of guaranteeing of deposits in banking institutions, as well as legal principles of credit activity in the USA.
A small English-Ukrainian glossary of banking terminology is included, in order to provide an understanding of American banking terminology.