The National Bank of Ukraine is expanding the list of benchmark domestic government debt securities ("benchmark bonds") that banks have been allowed to use to partially meet the reserve requirements.
Effective on 11 March, the banks will be able to meet the required reserve ratio using benchmark bonds with the following ISINs: UA4000227185, UA4000227193, and UA4000227201. The Ministry of Finance first placed the added securities at the primary auction on 28 February 2023.
According to NBU estimates, this step will encourage active participation in auctions held by the Ministry of Finance to place domestic government debt securities, which will help avoid direct funding of the budget deficit by the NBU in 2023.
The above list of benchmark bonds is set by the NBU taking into account the proposals of the Ministry of Finance. From 11 March 2023, it will include six issues of securities, with three of them added in January and February 2023 (UA4000227045, UA4000227094, and UA4000227102).
As previously reported, from 11 January 2023 onwards, the NBU allowed the banks to use benchmark domestic government debt securities to meet up to 50% of their total required reserve ratio. At the same time, there is an exception to this rule: benchmark bonds cannot be used by banks to form the extra part of reserves after the reserve requirement increase since 11 March.
The expanded list of benchmark bonds the banks hav been allowed to use to meet in part the reserve requirement was approved by NBU Board Decision No. 86 On Amendments to NBU Board Decision No. 752 dated 23 November 2017 dated 3 March 2023, to be enacted on 10 March 2023.
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) and take into account the share of required 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.