On 3 January 2017, the National Bank of Ukraine amended the Regulation for Measuring Credit Risk that Ukrainian banks use to calculate credit risk.

The regulation has been applied by banks in test mode since July 2016. Discussions are currently underway between banks and the NBU over its specific provisions. Having analyzed the results of the pilot implementation of this regulation and with regard to proposals from the banking community, the NBU amended the regulation to include provisions that, inter alia, have:

• Specified the definition and extended the deadline for the introduction of certain signs of high credit risk until early 2019;
• Lowered the Loss Given Default (LGD) ratio when it comes to the calculation of credit risk for state-owned enterprises (from 45% to 30%);
• Addressed the issue of credit risk assessment for swap transactions. The regulation has defined the conditions under which no credit risk arises under such transactions;
• Expanded the list of instruments guaranteeing the fulfilment of debtor's obligations by other group participants, in particular, through the issuance of sureties and irrevocable stand-by letters of credit;
• Allowed banks to use borrowers' financial statements retrieved from publicly available sources (for example, companies’ websites and the State Commission for Securities and the Stock Market);
• Specified collateral monitoring procedures;
• Extended the deadline for the implementation of the requirement mandating that all collateral items be covered by compulsory insurance until 2019; and
• Put in place risk assessment procedures for apartment building co-owners associations;

These amendments will offer a broader approach to dealing with borrowers in the post-crisis period.

This regulation was expanded to include a new section providing guidance on the assessment of loans granted for the implementation of investment projects.

As a side note, this regulation was approved by NBU Board Resolution No. 351 of 30 June 2016. This document replaced the regulation in force on Procedures for Making and Using Provisions Against Possible Losses on Asset Operations by Banks of Ukraine, approved by NBU Board Resolution No. 23 of 25 January 2012.

Amendments to the Regulation were approved by NBU Board Resolution No 5 of 16 January 2017.

For reference

Banks carry out credit risk assessment on a monthly basis. While provisions against asset-related operations are an element of IFRS-based financial statements, credit risk is an element of prudential reporting. Pursuant to the Instruction on the Procedure for Regulating Bank Activities in Ukraine, approved by NBU Board Resolution No. 368 of 28 January 2001, if the estimated amount of credit risk exceeds total provisions set aside by the bank, the difference reduces regulatory capital.