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NBU Launches Long-Term Refinancing Loans to Support Bank Lending and Liquidity

The NBU is introducing long-term refinancing loans for the banks. The loans, which will mature in up to five years, represent an addition to existing standard short-term refinancing instruments. This measure is intended to meet several goals at once in order to safeguard the nation’s financial stability and stimulate economic growth.

First, the long-term refinancing mechanism will support the banks that make hryvnia loans, reinforcing the effect of the measures the NBU has taken in recent months: cuts to the key policy rate and the introduction of loose reserve ratios.

Second, the new instrument will provide an additional assurance that the banking system has sufficient liquidity. This will also be important for the uninterrupted conduct of client transactions as confidence among the financial market’s participants worsens over coronavirus fears.

To determine the frequency of tenders to support the banks’ liquidity, and the volumes, terms, and other parameters of long-term financing, the NBU Board will make separate decisions after the NBU Monetary Policy Committee has discussed these issues.

In effect, long-term refinancing loans will carry a floating interest rate. It will be determined as the sum of the NBU’s key policy rate – which may vary as the NBU Board makes rate-setting decisions – and a constant percentage that will be in effect on the day the loan is granted and that will remain unchanged during the entire term of the refinancing loan. The banks wishing to repay these loans before they mature will be able to do so at any time.

To mitigate the risks it will take on when issuing refinancing loans, the NBU has also streamlined the regulatory framework that governs collateral eligibility requirements. In particular, the central bank has allowed the banks to direct funds received from the redemption of NBU certificates of deposit and the return on these certificates towards the partial early repayment of debt, provided these certificates have been included in the collateral pool. The NBU has also determined that foreign currency that goes into this pool must be held at the bank’s account with the NBU as a cash cover that bears no interest.

This creates more favorable conditions for the development of long-term lending to businesses and households, including mortgage lending and business development loans.

At the same time, the banks will be able to apply for long-term refinancing when they find themselves in need of additional liquidity. However, the banking system today has more than UAH 200 billion in hryvnia liquidity and over USD 8 billion in FX liquidity, making the new instrument a preemptive measure that aims to combat the potential economic fallout should recessionary tendencies in the global economy take a turn for the worse.

The implementation of the long-term financing mechanism was approved by NBU Board Resolutions No. 29 On Amendments to the Interest Rate Policy of the National Bank of Ukraine, dated 17 March 2020, and No. 30 On Approval of Amendments to the Regulation on the Use by the National Bank of Ukraine of Standard Instruments for the Regulation of the Banking System’s Liquidity, dated 17 March 2020. These changes go into effect on 19 March 2020.

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