The stress testing of the 15 largest Ukrainian banks according to the terms of reference agreed upon with the International Monetary Fund and the World Bank was completed by the end of August. The tests have revealed that nine out of the fifteen tested banks need to increase their capital. The required amount is UAH 56 billion.

However, as Alla Shulha, Director of the General Department of Banking Supervision at the National Bank of Ukraine emphasized, that it doesn’t mean that those nine banks are problematic or insolvent and that they urgently need the entire amount. ‘We continuously monitor the financial state of the banking system and keep it under control. The results of the diagnostic studies have no bearing whatsoever on recognition of these banks as problematic,’ Ms. Shulha stressed.

During the stress testing the situation was modeled for 3 years ahead. Consequently, the deficit of capital was assessed for that entire period. The test results have matched, to a large extent, the results of comprehensive inspection which the banking regulator has already carried out at several banks.

Alla Shulha also noted that all nine banks are required to submit a capitalization program to the National Bank by the end of September to prepare a forecast of how fast they can do it. According to Ms. Shulha, this has already been discussed with the bank’s owners and senior managements. Some of the financial institutions will be able to raise additional capital by the year of the end.

As for the possibility of the government acquiring stakes in banks, legislation allows it but that might happen only in large, systemically-important banks and on very strict terms.

The diagnostic studies and testing were carried out by Big Four audit firms approved by the IMF and World Bank. Diagnostic studies were based on the banks’ balance sheets as of 1 January 2014. Auditors assessed the banks’ credit portfolios as of the above date, evaluated the quality of their assets, revaluated collateral, checked correct formation of reserves, etc. Stress tests were used to assess a bank’s ability to withstand possible deterioration of situation in the nearest three years, i.e., how the value of mortgaged property may change, how borrowers will act in a particular situation, how problematic credit portfolio might increase, and so on.

Testing of the next 20 financial institutions is expected to be completed by the end of October.