The National Bank of Ukraine continues to implement the measures announced in January to enhance the monetary transmission and foster competition for term deposits among banks.
From 11 March, the banks’ required reserve ratios will be raised by another 10 pp for household demand deposits and current accounts. However, the banks will not be allowed to use benchmark domestic government debt securities to cover this portion of required reserves.
After the respective decision comes into effect, the banks will have to meet the following reserve requirements in the domestic currency:
- corporate demand deposits and current accounts – 10%
- retail demand deposits and current accounts – 20% (10% until 11 March)
- corporate (save for banks) and retail term deposits – 0%
- deposits and current accounts of other nonresident banks and loans issued by international institutions (other than financial institutions) and other nonresident organizations – 10%.
Denominated in foreign currencies:
- corporate demand deposits and current accounts – 20%
- retail demand deposits and current accounts – 30% (20% until 11 March)
- corporate (save for banks) and retail term deposits – 10%
- deposits and current accounts of other nonresident banks and loans issued by international institutions (other than financial institutions) and other nonresident organizations – 20%.
The additional increase in the banks’ required reserve ratios for household current accounts will help reduce the liquidity surplus in the banking system. According to the NBU’s estimates, total required reserves to be held by banks are expected to increase by about UAH 60 billion.
A decrease in spare liquidity in the banking system will encourage the banks to compete more for retail term deposits and further raise their interest rates on hryvnia deposits. The NBU expects these measures to help increase the share of term deposits in the system and mitigate risks to exchange rate and price stability in Ukraine.
Said changes were approved by NBU Board Decision No. 71 On Amendments to NBU Board Decision No. 752 dated 23 November 2017 dated 23 February 2023, and are effective from 10 March 2023.
In 2023, the NBU implemented a range of measures to enhance the monetary transmission, boost the domestic debt market, and mitigate risks to macrofinancial stability.
Prior steps were as follows:
- As from 11 January 2023, the NBU increased bank required reserve ratios by 5 pp for retail and corporate 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 February 2023, the NBU additionally increased bank required reserve ratios by 5 pp for retail and corporate demand deposits and current accounts and allowed the banks to cover the resulting increase in required reserves with benchmark domestic government debt securities. Also, the NBU has extended the list of benchmark domestic government debt securities that can be used to cover reserve requirements.
Reserve requirements 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) and take into account the share of reserves covered by benchmark domestic government debt securities. 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.