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KIEV, Dec 19 (Reuters) - Ukraine's takeover of its biggest bank follows a clash of kings between two of the country's richest men, Ihor Kolomoisky, who owned PrivatBank, and President Petro Poroshenko.
Kolomoisky fell out with Poroshenko in a dispute over state-owned energy companies that culminated in armed and masked men storming state-owned energy company UkrTransNafta in March 2015.
Asked last year whether he would ever use his ownership of PrivatBank for political leverage, Kolomoisky roundly dismissed the idea in an interview with news website Lb.ua.
But that has not stopped Kolomoisky from pursuing a political agenda and in June 2015 he formed the Ukrop party, the Ukrainian Association of Patriots, with so far mixed success.
"The bank is a sacred cow. It is on the plinth somewhere out there, and I am afraid to even look in that direction. I am not interfering in the bank's affairs," the 53-year-old said.
While PrivatBank may have been untouchable for Kolomoisky, it has become increasingly important to the Ukrainian banking system, with more than a third of private deposits, some $6 billion, and servicing more than 20 million Ukrainians, around half the country's entire population.
Its systemic importance was what Ukraine's central bank said had prompted it to take over PrivatBank, at a stroke making Kiev the largest player in the country's banking sector and depriving Kolomoisky of the jewel in the crown of his business empire.
Kolomoisky, who owns stakes in oil and metals companies, airlines and a media holding company, has not yet commented.
But PrivatBank's chairman on Monday said the owner's top priority was to meet obligations to depositors. He also denied the central bank's assessment of PrivatBank's balance sheet.
The chairman and deputy chairman both maintain the bank's lending practices were not to blame for its situation but a sustained campaign of "information attacks" on its reputation.
The central bank had previously singled out PrivatBank as the only major lender yet to prove it was up to speed with a recapitalisation programme agreed with the International Monetary Fund to prop up Ukraine's economy.
Ukraine's central bank has for years tried to nudge PrivatBank to clean up its balance sheet and on Monday, it declared the lender -- already hit by economic turmoil and the war against Russian-backed separatists since 2014 -- insolvent, adding that it had also been was brought low by risky lending.
The clean-up of the sector is a vital part of a $17.5 billion International Monetary Fund aid-for-reforms programme, which over the last two years saw Ukrainian banks halve in number to fewer than 100 and their losses mount to 120 billion hryvnias ($4.57 billion).
Last year the central bank ran a stress-test of the top-20 banks and ruled 11 banks would have to gradually increase their capital over next three years. It did not name the banks needing recapitalisation.
According to Fitch Rating's estimates, PrivatBank's bad loans stood at 40 percent of its portfolio at the end of the second quarter while just 37 percent were covered by reserves.
After the nationalisation of PrivatBank, state banks will control half of all Ukrainian banking assets.
PrivatBank's two owners were worth $1.3 billion each, making them the joint second-richest in Ukraine, according to Forbes' 2016 ratings. But unlike Kolomoisky, Gennady Bogolyubov, 54, shies away from public attention.
Editing by Matthias Williams and Alexander Smith