On November 24, 2014, the National Bank of Ukraine hosted a regular meeting with CEOs of the 40 largest Ukrainian banks. The discussion at this meeting centered on the issues related to the exchange rate setting, the formation of mandatory reserves, the money market situation and the peculiarities of the banking system operation in Donetsk and Luhansk.
The bankers affirmed that they saw tangible signs of gradual stabilization in the foreign exchange market. At the same time, the regulator once again emphasized that daily foreign exchange auctions are intended to find the equilibrium price in the market that currently lacks sufficient liquidity, rather than meet the demand for foreign exchange. The foreign exchange auction is nothing but the reflection of offers (bids), meaning that the submission of bids quoting non-market prices runs contrary to the very notion of this auction.
On November 24, 2014, in particular, the total amount of bids submitted by market participants was USD 27.3 million. The maximum hryvnia exchange rate quoted by auction participants was 15.2157 UAH = 1 USD, the minimum exchange rate stood at 14.90 UAH = 1 USD. Thus, based on the auction results, the weighted average exchange rate stood at 15.0496 UAH = 1 USD. It was noted at the meeting that if CEOs of banks believe that the market exchange rate should be higher, they should quote actual prices.
During the meeting, the bankers were offered to consider proposals put forward by representatives of the Independent Association of Ukrainian Banks (hereinafter – the IAUB) regarding the cessation of foreign exchange auctions as, in their view, they are an inefficient mechanism for searching the equilibrium exchange rate. This proposal did not receive support from the meeting participants. Most bankers called on the National Bank to continue the practice of holding daily foreign exchange auctions for the sale of foreign exchange.
Governor of the National Bank of Ukraine Valeriia Gontareva backed the proposal to continue the practice of holding daily auctions, but noted that banks should quote actual prices so as not to hinder the search for the equilibrium hryvnia exchange rate. According to her, the National Bank would soon consider the possibility of switching to the conventional Dutch auction and the abolishment of the indicative exchange rate.
The IAUB representatives also emphasized the need to raise the NBU discount rate to keep pace with inflation and considerably tighten requirements to the formation of mandatory reserves by banks. In the course of exchanging opinions on these proposals, it was pointed out that the National Bank of Ukraine had recently increased the discount rate from 12.5% to 14%. Therefore, the regulator deems it inexpedient to raise it again, arguing that an interest rate on refinance loans secured by domestic sovereign bonds that are provided through weekly tenders is set at 19-20%, whereas that on emergency loans stands at 21% (at the 1.5 discount rate), which corresponds to the inflation rate, which stands at 20.4% in annualized terms.
With regard to the mandatory reserves, the regulator intends to decrease reserve requirements on deposits in the foreign currency and increase reserve requirements on hryvnia deposits. These issues will be on agenda at the National Bank of Ukraine Board meeting this week.
Governor of the National Bank of Ukraine Valeriia Gontareva informed the attendees about the composition of international reserves. Among other things, she said that the National Bank of Ukraine decided to decrease the share of gold in its international reserves to 7% "+"/"-" 2%. As of today, the share of gold in international reserves stands at 8% and fully meets this benchmark. "We have balanced and streamlined the composition of gold and FX reserves," noted Valeriia Gontareva.
Deputy Governor of the National Bank of Ukraine Yakiv Smolii drew attention of the bank senior managers to the need of strict compliance with the requirements of NBU Board Resolution No. 466, dated August 6, 2014, "On the suspension of financial operations" with regard to restrictions on financial operations by banks, non-financial institutions and the National Operator of the Postal Service, which are payment institutions of the national/international payment systems and/or their participants, in the regions not controlled by the Ukrainian authorities.
Yakiv Smolii reminded the meeting participants that the National Bank of Ukraine had sent a letter to banks in connection with entry into force of the Ukrainian President's Decree dated November 14, 2014, No. 875/2014 On Decision of the National Security and Defence Council of Ukraine of November 4, 2014, on urgent measures to stabilize the situation in the Donetsk and Luhansk Regions.
The meeting participants also concurred to set up the Spearhead Group to address the problem of restructuring of foreign-exchange loans. This Group will comprise representatives from banks, experts from banking associations and members of the Public Council set up at the National Bank of Ukraine. The next meeting between the NBU's senior management team and bankers has been scheduled for next Monday.