As part of the new IMF arrangement under the Extended Fund Facility (see paragraph 17 of the Memorandum of Economic and Financial Policies), by end-July and end-September 2015, the National Bank of Ukraine we will update the diagnostic exercises for all operating banks among the top 10 and 10 subsequent banks, respectively, to identify additional losses associated with the conflict in the East and the downgraded economic outlook.

In the first phase of the diagnostic exercises, the National Bank of Ukraine will conduct an asset quality review of the asset side of bank balance sheets, examine whether banks maintain adequate provisioning levels for credit exposures and verify the valuation accuracy of banks' books. A representative sample of loans will include all loans amounting to or exceeding UAH 200 million, or 5% of the regulatory capital (less provisions), other loans accounting for 65% of the loan portfolio and loans to related parties (bank insiders) that exceed or amount to 1% of the regulatory capital. Following the loan quality review, the capital adequacy ratios will be calculated.

In the second phase, the stress test will be carried out using NBU internal modeling to identify banks' additional capital needs prompted by the deterioration in the economic situation. The stress test will cover a time horizon up to end-2017.

The diagnostic exercises will result in identifying the amount of additional capital needed for the bank to be fully capitalized. If this exercise reveals that banks are undercapitalized, the banks will be asked to present capitalization/restructuring plan. Should the exercise find insolvency in certain banks, these banks must be brought into solvency (positive equity) by end August 2015 and end-October 2015 for the group of 10 top and 10 subsequent banks, respectively.

In line with the Memorandum of Economic and Financial Policies (paragraph 17), the National Bank will carry out the assessment of risks arising from asset-side transactions with related parties (bank insiders).

Following the entry into force on March 8, 2015 of the law  that strengthens the liability of bank's related parties, banks are obliged to identify such persons based on the criteria and ratios set by the regulator.  

The first 10 largest operating banks will submit reports of related party exposure by end-May. The next 10 largest banks and all other banks will submit their reports by end-July 2015.

On the basis of terms of reference assigned to the NBU and agreed with the IMF and WB staff, one of the Big Four international accounting firms ("Deloitte", "PricewaterhouseCoopers", "Ernst&Young", "KPMG") will  be directly involved in carrying out comprehensive reviews of the banks’ related party exposure reports.

Following the analysis of the input information, during October – December, 2015, the National Bank of Ukraine will send its final reports to banks, listing all related party loans and the amounts by which they exceed limits.

Following the findings of the reviews of the banks’ related party exposure reports, banks will be required to submit to the NBU an action plan to unwind above-limit related party exposures within a set timeframe.