Ukraine adopts populist bill on protecting defrauded depositors

Ukraine’s parliament approved on Nov. 15 a law on protecting the rights of defrauded “depositors” initiated by the president on Nov. 11. This bill was drafted after the president met with the “depositors” of the failed Mykhaylivskiy Bank. This bank, via its outlets, attracted “deposits” for a related financial company, which in fact were not banking deposits and thus were not guaranteed by the Deposit Guarantee Fund. About 14,000 individuals, 45% of whom were older than 55 years, “deposited” almost UAH 1.5 bln in the financial company, according to the explanatory note to the law.

The adopted law stipulates that individuals who placed their money into financial companies – through a failed bank intermediary such as Mykhaylivskiy – have the same rights as the depositors of such a bank. Namely, they can count on compensation of their deposit in the amount of up to UAH 0.2 mln from the State Deposit Guarantee Fund, unless they had signed a notice that they knew about the absence of guarantee on such a placement. The Fund is obliged to study all such defrauded deposit cases and decide on the compensation.

Alexander Paraschiy: This is a purely populist measure that will cost at least UAH 1 bln to the state budget. However, the current power brokers think it’s an adequate expense in return for the publicity they will gain. The defrauded “depositors” of Mykhaylivskiy Bank had become a real headache for the government as opposition parties speculated on their misery in organizing a series of protests in Kyiv, the most massive of which took place on Nov. 15. So the president’s initiative is a result of his fear that their protest could swell into bigger protests against the government.

This bill contradicts common sense and rewards reckless behavior as the “depositors” of Mykhialivskiy placed their “deposits” at interest rates that far exceeded market rates. The market should punish those who take high risks but instead taxpayers are forced to compensate their losses. This precedent creates a moral hazard in the state awarding greediness and raising the risk of further populist initiatives once an aggrieved group demands them.