Today, during a meeting with CEOs of the largest banks, Governor of the National Bank of Ukraine Valeria Gontareva has reviewed recent developments in the money and foreign exchange markets which, according to her, have shown signs of stabilizing.   The NBU Governor also unveiled new instruments that would be offered to the market by the regulator, and briefed the meeting participants on dynamics of key macroeconomic indicators.

In spite of the difficult global economic situation, Ukraine’s foreign exchange market remains calm. The real effective exchange rate continues to strengthen. Furthermore, the banks' deposit base in the national currency has been expanding for the fourth month in a row. Hryvia deposits continue to show an upward trend, even factoring in the repercussions of the removal of insolvent banks from the market.     Since the beginning of June, domestic currency deposits have increased by 1.9%.  FX deposits have shown signs of stabilizing.   In June, FX deposit outflows eased, with FX deposits contracting by less than 1% mom. It is the best result in the recent months. Therefore, we expect FX deposits to resume growth in one or two months. We hope that banks will be able to increase their deposit portfolios by the end of this year, said the Governor of the National Bank of Ukraine.

As Deputy Governor of the National Bank of Ukraine Dmytro Sologub stressed, headline inflation has moderated for the first time since the start of 2014 due to stabilization of the foreign exchange market situation.  In June, the consumer price index was up by 0.4% mom, which is in line with the NBU's projections.

“We have observed stability in the market. Since April, the Hryvnia has appreciated against the US dollar, with UAH/USD exchange rate fluctuating within a fairly narrow range. We can also point to lower inflationary risks.  In addition, we expect inflation to follow a decelerating trend over the coming months. With a view to consolidating the positive developments in the money market, we left the discount rate unchanged. At the same time, should the disinflation trend persist, we will be able to reduce the discount rate,” stressed Dmytro Sologub.

Speaking about the adverse developments unfolding in Greece, he underlined that as the Ukrainian economy had no direct exposure to Greece, the repercussions of the Greek crisis would in no way impact the stability of the Ukrainian economy.

According to him, the reason why Greece has found itself in this predicament is because this country has lost the support of its creditors and it has no alternative funding sources. Unlike Greece, Ukraine enjoys good relations with its foreign creditors.  The external assistance programs remain largely on track and we hear positive statements made by our international creditors to this effect. Because Ukraine and the National Bank of Ukraine remain on track with fulfilling all commitments set out in agreements on financial assistance.

In addition, Dmytro Sologub added that unlike Greece, Ukraine has the possibility to use the exchange rate as an instrument for the macroeconomic adjustment. Being a euro-area member country, Greece was stripped of the ​​possibility to use the exchange rate mechanisms, whereas the internal devaluation failed to bring the desired result. Ukraine can use all these mechanisms. However, the implementation of structural reforms is crucial, as it basically entails the positive effects from the external and internal devaluation. 

Speaking about the factors that potentially can have an  impact on  the Ukrainian banking sector, Governor of the National Bank of Ukraine Valeria Gontareva pointed out that the recent voting in the Verkhovna Rada of Ukraine for draft law No 1558-1 on restructuring foreign exchange loans poses a direct threat to the existence of the country's financial and   banking system.  The only compromise solution to this problem is to join and execute the Memorandum on restructuring consumer loans in foreign currency. Because the negotiation process between borrowers and banks over restructuring of consumer loans in foreign currency should be undertaken only on a voluntary basis.

First Deputy Governor of the National Bank of Ukraine Oleksandr Pysaruk informed the attendees on the implementation of capitalization plans by the largest banks based on the results of last year's stress tests, which were carried out within the framework of the IMF Stand-By Arrangement and the Financial Sector Development Project supported by the World Bank. “All the banks that were required to increase capitalization to get fully capitalized have successfully executed their business plans devised based on the diagnostic study results and in line with commitments undertaken by banks to take measures to this effect within a set timeframe.   By doing this, they have contributed to enhancing the resilience of the banking system and the protection of bank depositors’ and creditors’ interests,” underlined Pysaruk.        

As Director of the Financial Stability Department Vitalii Vavryshchuk said, the diagnostic exercises for the 20 next largest banks are currently being conducted within the framework of the IMF's Extended Fund Facility Arrangement with Ukraine (Extended Fund Facility Arrangement, EFF). Based on their results, banks' additional capital needs will be identified.

“The first phase of the diagnostic exercises, during which an asset quality review was conducted, is coming to an end for the first ten banks.  After this, the second phase will be launched – banks will undergo stress tests based on baseline macroeconomic assumptions.    Banks' loan portfolios, securities portfolios (securities holdings except for domestic sovereign bonds), and the property transferred into the ownership of the bank in connection with the exercise of the rights of a a collateral holder will be subject to the stress testing.  All loans to bank related parties will be reviewed. The stress tests will be conducted taking into account adjustments made during the first phase of the diagnostic exercises,” said Vitalii Vavryshchuk.

He added that all large borrowers with loans exceeding UAH 200 million, or above 5% of the regulatory capital of the creditor bank, would undergo stress tests.   Based on the stress test results, expected losses and the amount of provisioning against  each large loan will be determined on a case-by-case basis, with taking into account the value of the collateral for each forecast horizon

During the meeting, Director of the NBU Open Market Operations Department Mykola Selekhman presented the meeting participants with certificates of deposit as liquidity management instruments available for banks.

Speaking about the legislative initiatives put forward by the National Bank of Ukraine and their current status, Director of the NBU Legal Department Viktor Novikov brought to the attention of the meeting participants a draft law under which a credit registry would have been established at the National Bank of Ukraine by the end of 2015.  This law would make it possible to identify and assess credit risks in a more efficient manner. All the specific measures have been developed and backed by the International Monetary Fund and the World Bank, as the adoption of this draft law is a structural benchmark set by the International Monetary Fund.