NBU is presenting the Macroprudential Policy Strategy. It elaborates on the NBU’s prospective actions to ensure financial stability – a prerequisite for sustainable economic growth. The Strategy lays the groundwork for the introduction of a systemic macroprudential policy in Ukraine and explains the policy to the public, thus ensuring the transparency and clarity of the policy and its greater effectiveness in achieving financial stability.
Facilitating financial stability comes as the NBU’s next most important function (second in priority to maintaining price stability) under the Law On the National Bank of Ukraine as amended in mid-2015. To fulfill that function effectively, the NBU has developed a macroprudential policy system that is necessary to prevent systemic risks from accumulating in the financial sector and improve its resilience to recessionary processes. The macroprudential policy system is described in the Strategy.
The NBU takes responsibility to implement the macroprudential policy along with the monetary policy that aims to achieve and maintain low inflation and along with the microprudential (supervision) policy that focuses on ensuring the resilience of certain banks and on safeguarding their owners. Unlike those of banking supervision, macroprudential policy instruments are applied to the whole of the financial system or to its individual groups and participants.
"As financial stability depends on not only banks but also non-bank financial institutions, the NBU will coordinate its efforts with other financial sector regulators – including through the interagency authority known as the Financial Stability Council – in order to identify and respond to systemic risks in a timely manner," said NBU Governor Yakiv Smolii while presenting the strategy.
The introduction of macroprudential policy in Ukraine comes as a requisite measure to reinforce the financial system’s protection from potential crises.
Having survived three systemic banking crises in the past 20 years, Ukraine is in the top three countries by their frequency. The last of the crises, which came in 2014–2016, cost the nation nearly 40% of GDP and laid severe restrictions on bank lending and economic growth. This is evidence that ineffective regulation of the financial sector – both at the level of individual financial institutions and at the level of the entire system – comes at a price.
To mitigate the consequences of the most recent crisis, the NBU has accomplished a significant amount of work, conducting a complete overhaul of how individual banks are supervised, increasing the transparency of the banking system, and tightening the requirements for its participants, including requirements for capital, liquidity, corporate governance, risk management, etc. The NBU already is applying certain macroprudential instruments like the LCR and additional requirements for capital based on the results of stress testing. The publication of this Strategy marks the transition to a more systemic macroprudential regulation.
"The NBU’s implementation of macroprudential policy will not only make the financial system more sustainable but also reinforce trust towards banks and facilitate a further macroeconomic stabilization. In the long run, it will ensure sustainable economic growth, more resilient to negative shocks and crises," said the NBU Governor during the presentation of the Strategy.
The ultimate goal of macroprudential policy is to ensure financial stability by increasing the resilience of the financial system and by preventing the accumulation of systemic risks.
This objective will be met by achieving interim goals. Based on the recommendations made by the European Systemic Risk Board and the specific nature of the Ukrainian financial system, the strategy has six interim goals:
- Preventing excessive growth in lending
- Preventing the liquidity gap from widening
- Preventing risk concentration
- Limiting the influence of distorted incentive
- Enhancing the soundness of financial infrastructure
- Decreasing the dollarization level in the sector.
The strategy details the steps the NBU will take to achieve its interim goals, beginning from identifying systemic risks and choosing, calibrating and activating macroprudential tools and ending with evaluating their influence on a given situation and deciding whether or not to continue applying them. The document also provides a list of macroprudential tools that the NBU is either using or plans to introduce. The document describes the potential effect of each instrument and says what typical systemic risks the instrument targets. The list is not exhaustive and can be extended, if required.
Special focus is given to the long-term risks that are being faced by the Ukrainian financial sector. These are:
- the short maturities of bank deposits
- a high dollarization level in the banking sector
- a significant share of state capital in the banking sector
- a spike in consumer lending
- the migration of assets and transactions to the non-bank financial sector
- a high concentration of credit risk
- and a large proportion of non-performing loans.
The NBU will inform market participants in advance of any decisions to introduce macroprudential instruments, and provide reasons for these decisions.
Financial Stability Reports, which are published by the NBU in June and December every year, are the main source of information about systemic risks. Other important regular publications of the central bank in this regard include Banking Sector Reviews, Systemic Risk Surveys, and Lending Surveys.