The National Bank of Ukraine (NBU) has approved the methodology for 2021 stress testing of banks to be launched in May.
Please be reminded that stress testing is one of thestages of the banks’ resilience assessment. This year 30 institutions are to be stress tested. They account for 93% of the banking system assets.
Like other regulators, the NBU resumes bank stress-testing after a COVID-related yearly suspension. Stress testing will enable in-depth analysis of the sector after the 2020 crisis year and help gauge banks’ resilience to possible adverse events in the future.
As before, stress testing will be conducted under baseline and adverse scenarios. The forecast horizon is three years. Given that in 2020 banks underwent a crisis, the NBU’s adverse scenario for stress testing is moderately negative, however the scenario is sufficient to assess the banking sector resilience to deep and prolonged crises.
Specifically, the adverse macroeconomic scenario assumes a 2.2% drop in GDP in the first year. For other assumed changes in macroeconomic indicators for stress testing in 2021 follow the link.
Also, conventionally stress testing will assume the realization of credit and market (interest rate and currency) risks.
- Credit risk will be assessed individually for large loans to big corporate borrowers, and on a group basis for other loans. Under the adverse scenario, about 10%–15% of hryvnia loans will become nonperforming.
- The interest rate risk in the adverse scenario materializes through increase in deposit rates and market yields on government and municipal securities. Factoring in the negative impact of the macroeconomic conditions on the yields and respectively the value of debt securities is this year’s novelty of the stress testing methodology. However, this corresponds to the established approaches to stress testing in European countries and IMF methodology.
- Currency risk arises from banks’ unbalanced foreign exchange positions and the assumption that hryvnia will depreciate.
The impact on banks from regulatory changes scheduled for the next three years will be assessed separately as part of stress testing. Thus, potential implications of novelties for banks will be timely evaluated avoiding the double-counting of this effect.
Following the stress testing, the required capital adequacy will be set for banks to prevent violations of statutory requirements and insolvency, even under crisis conditions.
If an estimated capital adequacy for a bank is above its actual value, the bank will be obligated to provide a capitalization/restructuring program. The program implementation should ensure the required capital adequacy level.
Stress testing is to commence in May. Further information on findings of the sector resilience assessment will be published in autumn; bank-specific data will be published by the end of this year.
The stress testing approaches are prescribed by NBU Board Decision No. 177 On Amendments to Some Regulatory Documents of the National Bank of Ukraine that was signed and entered into effect on 30 April 2021.
In 2018, the NBU launched the resilience assessment of banks (for 2018–2019 findings follow the link) that envisages, among other things, the stress testing of the banks that are identified by the NBU in a separate decision. The stress testing under the baseline and adverse scenarios aims to assess indicators from banks’ financial statements (balance sheets and profit and loss statements) and the required level of capital for the three years from the reporting date.