The NBU continued to implement measures in 2019 that the EU-Ukraine Association Agreement stipulates Ukraine should take as part of its EU integration roadmap.
One of the actions the central bank took last year was to focus on implementing EU legislation to streamline banking regulation and supervision, liberalize capital flows, further safeguard consumer rights in financial services, and update the operational framework for payment systems.
Banking Regulation and Supervision
The NBU continued its work to harmonize Ukrainian banking laws with EU legislation. Specifically, the NBU consistently implemented new regulations that correspond to major EU acquis acts and take into account the European Banking Authority’s recommendations and global best practices:
- The NBU set requirements for the filing of disaster recovery plans by banks and banking groups. While these requirements are a must for systemically important banks, other banks are advised to meet them as well. When a bank’s financial standing deteriorates or the bank finds itself in distress, having a ready-made recovery plan enables the bank to take immediate action to restore financial resilience.
- The NBU continues to gradually implement new liquidity ratios. First, the central bank fully introduced the liquidity coverage ratio (LCR). In December 2019, the LCR minimum requirement reached 100%. The banks met the requirement for all currencies. The same month, the NBU approved the net stable funding ratio (NSFR), another prudential requirement for banks. A starting value and transition period for implementing the NSFR in Ukraine will be determined when test calculations have been made. These will be conducted monthly from August 2020 through the end of the year. The NSFR will be made mandatory starting in 2021.
- The NBU adopted a new procedure to identify systemically important banks. The central bank applied the new approach in June 2019, recognizing 14 banks as systemically important. From 2021 onward, these banks will be required to have an additional capital buffer known as systemic importance buffer.
- The NBU approved internal NPL management requirements for banks.
- The regulator initiated the monthly calculation and publishing of financial resilience indicators. The NBU introduced the reporting of loan performance measures that indicate the degree of relatedness between banks and business groups, the maturity of financial instruments, and the type of interest rate accrual in an agreement.
- The regulator introduced internal control system requirements for Ukrainian banks and banking groups. The NBU identified key objectives and operating principles of a comprehensive, adequate, and efficient internal control system that aims to ensure that corporate governance at the banks and/or banking groups is effective.
Capital Flows Liberalization
The Law of Ukraine On Currency and Currency Operations, for which the NBU drafted proposals in collaboration with European experts, went into effect on 7 February 2019. The law brought about a sweeping overhaul of Ukraine’s currency regulation system. With the adoption of the new law, Ukraine launched a simple, comprehensible, and transparent regulatory framework that replaced 56 outdated FX regulations with 7 major regulations, laying the groundwork for a new liberal system of currency regulation.
The NBU phased out old FX restrictions in 2019 as macroeconomic conditions in Ukraine improved.
All in all, the NBU eased or canceled about 40 FX restrictions for businesses, banks, foreign investors, and households. In particular, the central bank:
- cancelled the currency surrender requirement for businesses
- removed all limits on repatriation of dividends
- allowed businesses to buy any amount of foreign currency with borrowed hryvnias
- canceled the requirement for businesses to make hryvnia deposits prior to purchasing foreign currency
- removed the limit on daily FX purchases by individuals
- authorized online sales of foreign currency to households
- launched a convenient system of e-limits on investments abroad by both individuals and legal entities
- enabled the use of new financial instruments (swaps, nondeliverable forwards) to hedge FX risks, etc.
Consumer Rights Protection
The Verkhovna Rada of Ukraine adopted a law in September last year that safeguards consumer rights in financial services and that is in alignment with EU legislation. Under this law, the NBU commits to protecting consumer rights in financial services.
The NBU launched the Office for Protection of Consumer Rights in Financial Services, a unit within the central bank that is charged with streamlining the regulatory framework to bring it in line with EU acquis. The new unit has already developed requirements for Ukrainian banks to provide clients with information on financial services, and recommendations on how to process customer requests and interact with customers during person-to-person meetings.
The NBU is planning to adopt new requirements for banks regarding agreements, website content, ads touting small-sized loans, disclosure of information about services through electronic channels, processing of customer requests, fraud prevention techniques, etc.
Payment Services
The NBU paid significant attention in 2019 to the development of the regulatory framework that governs payment services. Specifically, the NBU in July last year presented to payment market participants its vision of the new legal framework to regulate the market for payments and money transfers.
A joint effort is underway between NBU staff and Ukrainian and EU experts to draw up a comprehensive draft law on payment services that will take into account EU regulations and global best practices.
In addition, the NBU participates in drawing up legislative proposals and initiatives in other areas covered by the Agreement. These include anti-money laundering, combatting tax base erosion, accounting and audit, and corporate governance.
In 2020, the NBU will continue to follow through on the EU-Ukraine Association Agreement, including by implementing EU acquis acts as stipulated in the NBU’s Action Plan to implement the Association Agreement and the Strategy of Ukrainian Financial Sector Development until 2025.
For reference
The EU-Ukraine Association Agreement was signed in 2014. Under the agreement, relations between the parties are to evolve from partnership and cooperation to political association and economic integration. The agreement came into full effect on 1 September 2017. Before that, the parties applied the agreement provisionally.
The NBU took active part in negotiating the Agreement and is currently implementing four out of the document’s seven sections. Section IV outlines most of the commitments involving the financial sector, particularly the banking sector. It covers trade in financial services, the implementation of international standards, the alignment of Ukrainian laws and regulations with the EU’s legal framework, the movement of capital and payments, etc.