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NBU Implements Announced Change in Calculating Required Reserves to Boost Competition among Banks for Retail Term Deposits

NBU Implements Announced Change in Calculating Required Reserves to Boost Competition among Banks for Retail Term Deposits

As announced, from 11 May 2023, the NBU makes the banks’ required reserve ratios for retail deposits of up to three months equal to required reserve ratios for retail clients’ current accounts.

The required reserve ratio for term deposits and retail deposits with initial maturity of up to 92 calendar days (inclusive) will be set at 20% for hryvnia deposits and 30% for foreign currency ones. On the other hand, the required reserve ratio for retail deposits maturing in 93 days or more will remain unchanged, at 0% for hryvnia deposits and 10% for foreign currency deposits.

Similarly to requirements for retail clients’ current accounts, the mechanism of required reserve coverage with benchmark domestic government debt securities will not apply to the portion of required reserves created for retail deposits of up to three months, which corresponds to 10% of the reserve base.

This step is aimed at maintaining the effectiveness of required reserves mechanism and strengthening market stimuli for the banks to attract retail term deposits. In particular, this will ensure continued growth in interest rates on term deposits, thus better protecting households’ hryvnia savings from being eroded away by inflation.

The NBU estimates total required reserves to be held by the banks will increase by around UAH 17 billion.

As a reminder, the NBU in 2023 has implemented a range of measures to enhance the monetary transmission, boost the domestic debt market, and mitigate risks to macrofinancial stability. Raising reserve requirements was one of such measures. In January–March 2023, the NBU increased required reserve ratios for demand deposits and current accounts cumulatively by 20 pp for retail clients and by 10 pp for legal entities. In addition, the NBU allowed the banks to cover a part of required reserves with benchmark domestic government debt securities.

Thanks to the key policy rate remaining at 25% and additional measures taken by the NBU, interest rates on new retail term deposits in the hryvnia grew more rapidly. In February 2023, they were higher by 7.7 pp compared to June 2022 (when the key policy rate rose to 25%). Such an increase in interest rates was even slightly above the expected trajectory considering the elasticity estimated based on previous years’ data.

The banks that took the lead in raising their interest rates in recent months were able to improve the term structure of their deposits. At the same time, the largest banks, which are the main liquidity beneficiaries due to substantial budget expenditures, still have interest rates that are not attractive enough to depositors given the current and expected inflation. As a result, unprecedented volumes of households’ funds are being kept in current accounts, generating additional risks to macrofinancial stability.

In order to neutralize these risks, the NBU is taking additional steps to increase the banks’ competition for retail term deposits, including by approving the changes in calculation of required reserve ratios.

The said changes were approved by NBU Board Decision No. 115 On Amendments to NBU Board Decision No. 752 dated 23 November 2017 dated 24 March 2023, which takes effect on 10 May 2023.

For reference

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 absorb a part of the banking system’s spare liquidity.

All data on required reserves held by the banks are available here.


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