The National Bank of Ukraine, as announced, has allowed the banks to use domestic government debt securities to meet up to 50% of their total reserve requirements (RR).
Specifically, when forming RR within the new period of their maintenance, which begins on 11 January 2023, the banks will be able to use benchmark domestic government debt securities with ISIN UA4000227045 to fulfill reserve requirements. Relevant securities were first offered by the Ministry of Finance in the primary auction held on 3 January 2023.
According to the NBU's estimates, the measure will help revive the banks’ participation in the primary market for domestic government debt securities, avoid the monetary financing of the budget deficit in 2023, and partially absorb the free liquidity of the banking system.
Said changes were approved by NBU Board Decision No. 7 On Amendments to NBU Board Decision No. 752 dated 23 November 2017 dated 5 January 2023, and are effective from 10 January 2023.
In December 2022, the NBU announced the introduction of a set of measures aimed at strengthening monetary transmission and revitalizing the domestic debt market, which included allowing the banks to use benchmark domestic government debt securities to partially fulfill the RR. Earlier, the NBU implemented another measure of the set by increasing the RR ratios for the banks.
Reserve Requirements are one of the conventional instruments of central banks. Here is how reserve requirements essentially operate: a bank takes responsibility to set aside in its correspondent account an amount of funds expressed as a certain percentage of the bank’s liabilities (also known as a reserve ratio). This amount should be formed as an average for the reserve maintenance period. This makes it possible to smooth out potential ad hoc (unpredictable) fluctuations in liquidity, while also ensuring the effective use of reserve requirements for their primary purpose, which is to limit a part of the banking system’s free liquidity.
All data on the reserve requirements for banks are available here.