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The National Bank of Ukraine Introduces New Liquidity Management Instrument

The National Bank of Ukraine as the lender of last resort introduces a new liquidity management instrument – Emergency liquidity assistance (ELA).

ELA loans are intended to cover temporary liquidity shortages experienced by a bank, which is provided in the event of emergency liquidity needs when banks have exhausted other sources of liquidity support, in particular financing provided by shareholders and standard refinancing facilities provided by the NBU against the collateral of government securities and foreign currency.

Banks will be required to use ELA loans to meet their obligations to depositors and other creditors (except related parties). These loans cannot be used to finance a bank’s business or address structural problems facing a bank. Banks are not allowed to use ELA loans as equity injections needed to meet additional capitalization requirements.

"Having this instrument in the NBU’s toolkit will contribute to the financial system stability as it will enable the NBU to support solvent banks’ liquidity by providing a prompt access to loans," said NBU Deputy Governor Mr Oleg Churiy.

When making a decision on the provision of emergency liquidity assistance, the NBU will assess a bank’s solvency, its compliance with the recapitalization plan (if available), and carry out analysis of the bank’s ability (funding sources) to repay a loan indicated by the bank in the financial model, as well as cash flow analysis.

To be granted an access to ELA loans, banks will have to make preparations in advance before they face liquidity problems:

First, they will have to design a contingency plan of actions to be taken in the event of emergency (contingency planning).

Second, they will have to conduct collateral appraisal well in advance.

Third, banks will have to enter into a general agreement on ELA that will enter into force from the moment of signing and contain the terms and conditions for the disbursement and repayment of a loan, restrictions on activities and the responsibilities of parties.

Thanks to making the necessary preparations in advance, banks will be able to secure a prompt access to refinancing from the NBU without having to waste time on conducting collateral appraisal, undergoing the loan-providing procedures and the execution of documents when faced with urgent liquidity problems in the event of emergency,” explained Mr Oleg Churiy.

In particular, banks can provide the following instruments as collateral:

  • government guaranteed bonds,
  • liquid immovable property (except objects under construction),
  • property rights under credit agreements entered into by a bank and legal entities (except for banks and budget institutions) and natural persons, obligations under which are fully secured by mortgage except for objects under construction;
  • property rights under credit agreements with individuals, except for individual entrepreneurs (according to banks Credit Agreement Registry).

As a result, if needed, banks that meet the prescribed requirements, will be able to obtain a loan with a maturity of up to 90 days from the NBU in one or several instalments at an interest rate that is equal to the key policy rate plus 2% per annum.

Amount of loan shall be calculated based on the forecasted amount of cash outflow to meet obligations to depositors and other creditors except related parties. At the same time, it shall not be more than the amount of collateral provided including the respective ratios.

Within the term of validity of this agreement, NBU will impose on bank certain restriction, which will prevent the misuse of a loan and mitigate liquidity risks for a bank. In particular, restrictions will be imposed on the following transactions:

  • asset-side transactions and investments;
  • buyout of shares of own issue;
  • early redemption of own debt securities;
  • allocation of capital;
  • payment of bonuses and compensations to employees;
  • early repayment to related parties and some other transactions.

The introduction of a new instrument is provided by NBU Board Resolution No. 411 of 14 December 2016 "On Approval of the Regulation On the Emergency Support of Banks Liquidity by the National Bank of Ukraine". The resolution comes into effect from 16 December 2016.

From the effective date of this Resolution on emergency support to banks liquidity, the NBU will not consider requests and documents from banks regarding granting stabilization loans according to the Regulation on Disbursement of Stabilization Loans to Ukrainian Banks by the National Bank of Ukraine approved by NBU Board Resolution No. 327 of 13 July 2010.

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