The National Bank of Ukraine (NBU) continues to implement the announced measures for enhancing monetary transmission and reviving the domestic debt market.
As announced last week, the NBU will additionally raise the required reserve ratios by 5 pp for demand deposits and current accounts as from 11 February. Thus, the banks’ required reserve ratios will increase from 5% to 10% for hryvnia deposits, and from 15% to 20% – for FX deposits. This concerns:
- corporate and retail demand deposits and current accounts
- deposits and current accounts of other nonresident banks and loans issued by international institutions (other than financial institutions) and other organizations.
However, the required reserve ratio will remain unchanged for term deposits of corporate and retail clients: 0% for hryvnia deposits, and 10% for FX deposits.
According to NBU’s estimates, the total required reserves to be held by banks are expected to increase by about UAH 73 billion.
This will lower the liquidity surplus in the banking system and encourage the banks to compete more for term deposits. The NBU expects this to push up both the rates on hryvnia assets and the share of term deposits in the banking system.
Furthermore, from 11 February, the banks will be able to use a wider list of domestic government debt securities eligible to cover up to 50% of their total required reserves.
Besides benchmark domestic government debt securities with international ID (ISIN) UA4000227045, the banks will be able to use benchmark domestic government debt securities with ISIN UA4000227094 and UA4000227102 to cover their required reserves. The Ministry of Finance first placed the added securities at the primary auction on 24 January 2023.
According to NBU estimates, this step will encourage the banks to continue participating actively in auctions held by the Ministry of Finance to place domestic government debt securities, which will help revive the domestic debt market and avoid direct funding of the budget deficit by the NBU in 2023.
Said changes were approved by NBU Board Decision No. 40 On Amendments to NBU Board Decision No. 752 dated 23 November 2017 dated 30 January 2023, and are effective from 10 February 2023.
In January 2023, the NBU increased the required reserve ratios by 5 pp for demand deposits and current accounts and allowed the banks to cover up to 50% of their total required reserves with benchmark domestic government debt securities. As from 11 January, the banks may use domestic government debt securities with ID UA4000227045 to cover their required reserves.
Required reserves are one of the conventional instruments of central banks. Here is how required reserves essentially operate: a bank must set aside in its correspondent account an amount of funds defined as a percentage of the bank’s liabilities (also known as the reserve ratio). This amount is calculated as an average for the reserve maintenance period. This makes it possible to smooth out potential occasional (unpredictable) fluctuations in liquidity, while also ensuring the effective use of required reserves for their primary purpose, which is to limit a part of the banking system’s spare liquidity.
All data on required reserves held by the banks are available here.