On 25 September 2018, the NBU Board headed by Governor Yakiv Smolii held a quarterly meeting with the managers of the 40 largest Ukrainian banks. The meeting focused on prospects for the development of the economic situation and the banking sector, the NBU’s regulatory innovations, as well as the most anticipated financial laws for the fall of 2018.
“Ukraine has entered a pre-election period, but I emphasize that the NBU continues to stay out of politics and remains independent and focused on the discharge of its mandate and further implementation of reforms,” said the NBU Governor, opening the meeting. “In any case, the NBU will not return to fiscal dominance. Under the Monetary Policy Strategy, going forward, our policy will be aimed at ensuring inflation at 5%, and the NBU does not even consider financing the budget deficit through the purchase of domestic government bonds.”
Summarizing the visit of the IMF mission to Kyiv, the NBU Governor noted that the dialogue as a whole was constructive. “Negotiations are in progress. There are no problems with the part the NBU is responsible for. We are waiting for the necessary steps – bringing gas tariffs to the market level, and final settlement of certain issues related to the state budget. We are optimistic,” said Yakiv Smolii.
Speaking about the banking system, Yakiv Smolii noted that it had shown better financial results from the beginning of 2014: in the first eight months of 2018, net profits of solvent banks amounted to UAH 13.75 billion. At the same time, in 2018, the level of provisions will probably be the lowest for the past decade. According to the NBU Governor, this result is evidence that banks did a great job in doing their “homework” on conducting additional capitalization, clearing balance sheets from low-quality assets, and raising operational efficiency. Banks continue to resume lending, especially retail lending and lending to trusted corporate borrowers.
Also, a new trend is emerging in the banking system – the reduction of the liquidity surplus.
“We expect that next year the banking system will go into liquidity deficit, so it’s worth thinking about liquidity collateral in advance in order to be able to use refinancing instruments,” the NBU Governor told bankers.
First Deputy Governor of the NBU Kateryna Rozhkova, in her turn, told the audience that the NBU continued to implement European financial market regulations that are based on Basel III recommendations.
In particular, SREP (Supervisory Review and Evaluation Process) is virtually implemented, although for some of its instruments, the implementation is still underway. In this regard, the NBU does not copy norms and regulations, but rather adapts them to the Ukrainian environment.
“Given the development level of the Ukrainian financial market, it is too early for us to implement certain Basel III requirements. The NBU takes a proportional approach: the complexity level of regulations must correspond to the market development level. Accordingly, we first implement regulations that are needed by the Ukrainian market,” emphasized Kateryna Rozhkova. “It was important for us that banks started to fully comply with existing regulations and that financial indicators and the level of compliance with prudential requirements, as reported by banks in their statements, could be trusted. Only then can we talk about implementing any additional norms and tightening the current ones.”
The First Deputy Governor reminded everyone of the plans to implement Basel III liquidity requirements. In 2018, with the goal of sustaining financial stability and enhancing the banking system’s resilience to possible liquidity shocks, the NBU introduced a new prudential requirement – LCR, or liquidity coverage ratio, which banks calculate in pilot mode at present. From 1 December 2018, it will become mandatory to meet this ratio. The starting level for the first official LCR calculations in December will be announced in November.
The Net Stable Funding Ratio (NSFR) will also be implemented, but starting 2020. The NSFR is more difficult for banks than LCR, as it entails significant changes to the term structure of liabilities, because, currently, Ukrainian banks depend heavily on short-term funding. That is why the introduction of the NSFR will be carried out later and will take several years to complete.
According to Kateryna Rozhkova, the NBU will introduce capital buffers and new requirements for the structure of regulatory capital in 2020. The introduction will take some time, as it requires amendments to the laws related to new capital instruments, such as perpetual subordinated debt. This is the subordinated debt that can be included in Tier 3 capital, while being FX denominated. When certain conditions are triggered, it must be converted into authorized capital.
Deputy Governor of the NBU Oleg Churiy spoke on the implementation of the Law of Ukraine On Currency and Currency Operations, which will ensure Ukraine’s long-awaited transition to liberal and transparent currency regulation. The first step on this way was to develop a draft legal framework, which will come into effect together with the law on 7 February 2019. According to Oleg Churiy, the new currency regulation will be simple, clear, and easy to understand, and will comprise seven key legal acts.
“We are planning to discuss each draft resolution with the banking and expert community before we finally complete them and publish their final version in early January,” promised Oleg Churiy.
At the same time, the NBU continues currency liberalization, which is aimed at improving the investment climate. Starting 1 November, currency controls will be loosened to let nonresidents purchase foreign currency in order to repatriate foreign investments in domestic government bonds. “Combined with a law on the nominal holder and opening of an international settlement depository account with the NBU’s Depository, this will help increase foreign capital inflows to Ukraine’s national debt market,” noted the Deputy Governor.
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Since 2014, the NBU has held regular meetings with top managers of the 40 largest banks, which represent 96% of the banking system’s total assets. At present, the meetings are held on a quarterly basis. The next meeting with the managers of the largest banks is planned for December 2018.