On December 30, Governor of the National Bank of Ukraine Valeriia Gontareva gave a press conference at the National Bank of Ukraine.
She has informed the public about the main challenges currently facing the Ukrainian banking system, the situation in the money and FX markets, and unveiled the regulator's plans to restore confidence in banks and the financial system of the country.
According to the Governor of the National Bank of Ukraine, the current state of the banking system is the result of large-scale macroeconomic imbalances built up in the previous years, the poor performance shown by the banking sector in the past six years, the annexation of the Autonomous Republic of Crimea and hostilities in the east of Ukraine. These are the major factors behind a fall in GDP, a sharp Hryvnia devaluation, and high inflation rates.
When speaking about the measures taken by the National Bank in these circumstances, Valeriia Gontareva noted that the decision to move to a flexible exchange rate regime, which was adopted jointly by the National Bank of Ukraine and the Government of Ukraine in April 2014, had been the most "painful". At the same time, the Governor of the National Bank of Ukraine emphasized that this decision had proved timely and received backing from the International Monetary Fund and other foreign creditors.
Valeriia Gontareva noted that the exchange rate of the national currency mirrors the state of the economy and the balance of payments and emphasized that in the case of imbalances in the country's balance of payments, the National Bank of Ukraine deploys the toolkit available at its disposal, in particular, interventions and administrative measures. However, these mechanisms cannot be viewed as standing or permanent, they are temporary and short-lived. These instruments are implemented to stabilize the situation in the country. Given the launch of military actions in the east of the country and an upsurge of panicky sentiment in the market, the regulator was forced to impose restrictions, including harsh verifications of all the export and import contracts, a ban on payment of dividends, as well as the imposition of mandatory sale of 75% of foreign exchange earnings.
"A large-scale financial crisis can be tackled by taking decisive, concerted actions, which include fiscal austerity measures and financial support from foreign donors. Only confidence in the future could restore public and business confidence in the banking system. For the National Bank of Ukraine, this crisis is time for taking decisive action. Therefore, we have embarked on banking sector reforms," noted the Governor of the National Bank of Ukraine.
"Presently, the National Bank supports the State Budget of the country that experiences a large-scale economic and financial crisis. It should be understood that that the funds that the National Bank "injects" into the economy by providing financial support to banks, redeeming government securities, and selling foreign exchange to support Naftogaz of Ukraine's payments for imported natural gas are primarily intended to support the state. Under such challenging conditions, it is very difficult to maintain the exchange rate at an equilibrium level," added the Governor of the National Bank of Ukraine
"The National Bank takes the lead in implementing reforms in our country – it is actively involved in reforming the banking sector and itself, as the international community acknowledges," noted Valeriia Gontareva. She pointed out that a shift to a flexible exchange rate regime, a drastic change in approach to refinancing of banks and the rehabilitation of the banking sector by "purging" it and reforming the National Bank were among the main achievements of the National Bank of Ukraine on its path towards reforming the banking system.
"Going forward, no bank will receive refinancing loans against dubious, poor-quality collateral. Only high-quality collateral certified by an international auditor will enable banks to receive funds from the National Bank," said Valeriia Gontareva. "Only eligible banks that are solvent, have sufficient capital buffers, or the approved recapitalization program can count on support from the regulator," she added.
The removal of problematic and insolvent banks, as well as "money laundering" banks from the market has contributed to enhancing the resilience of the banking system to shocks. The diagnostic studies of the largest banks enabled the regulator to identify the banks that require additional capital. Most bank owners have already developed plans to increase the authorized capital and the National Bank has endorsed these plans," said the Governor of the National Bank of Ukraine.
Valeriia Gontareva noted that the National Bank of Ukraine had launched banking sector reforms by reforming itself and informed the journalists about the main stages and areas of focus of the NBU transformation project. The transformation of the regulator's organizational structure has led to a UAH 6 billion cut in administrative expenses. These funds will be channeled to the State Budget of Ukraine.
The Governor of the National Bank of Ukraine also unveiled the regulator's plans and outlined priority actions for the regulator, which include active cooperation with foreign donors to increase financial aid required to sustain the balance of payments deficit, and recapitalization of banks and the Deposit Guarantee Fund. In addition, Valeriia Gontareva informed the attendees that the National Bank had drafted amendments to the legislation in order to enhance the protection of creditors' rights, reinforce responsibility of banks' owners for insider lending and misreporting, compile the Credit Register of the National Bank and restructure FX loans, etc.
Valeriia Gontareva emphasized that the country would never again maintain a fixed exchange rate regime, whereas the monetary policy of the National Bank of Ukraine would be focused on undertaking a shift to an inflation targeting regime. To this end, according to the Governor of the National Bank, it is necessary to lay the legal grounds for relinquishing budgetary dominance. On its part, the National Bank sets up the Monetary Policy Committee. The establishment of this Committee will enable the regulator to streamline the monetary policy decision-making process in line with international practices.
The Governor of the National Bank of Ukraine expressed her confidence that Ukraine would receive the required financial support from international financial institutions, which would provide the Government with time and an opportunity to undertake reforms.