Ukraine’s banking system is ready for the introduction of the Net Stable Funding Ratio (NSFR), a new prudential requirement that will take effect on 1 April 2021, will be mandatory, and will be recalculated every ten days.
The decision to introduce the NSFR was approved by NBU Board Resolution No. 158 dated 24 December 2019.
The main purpose of the NSFR is to encourage banks to rely on more stable and long-term funding sources and reduce their dependence on short-term financing. This will address the maturity mismatch and help mitigate a systemic risk to financial stability that is posed by reliance on short-term bank funding.
The methodology for calculating the NSFR was approved by NBU Board decision No. 1001-D dated 24 December 2019.
It is calculated as a ratio between available stable funding and required stable funding, which are defined as follows:
- available stable funding is the amount of regulatory capital and liabilities weighted by the ratios set by the NBU that reflect the stability of these liabilities over a one-year horizon, taking into account their residual maturity
- required stable funding is the amount of assets and off-balance-sheet liabilities weighted by the ratios set by the NBU that characterize the liquidity of these items over a one-year horizon, taking into account their residual maturity
The NSFR determines the minimum required level of bank liquidity for a one-year horizon. Under EU standards and Basel guidelines, the NSFR for banks must be at least 100%.
Banks will have to reach this NSFR level gradually. Under the NSFR implementation timeframe approved by NBU Board Resolution No. 166 dated 22 December 2020, banks must ensure that their indicators meet the required ratios, which will be at least:
- 80% starting 1 April 2021
- 90% starting 1 October 2021
- 100% starting 1 April 2022.
The initial value and the transition period for implementing the NSFR have been determined by the NBU based on the test calculations made on a monthly basis since August 2020.
As reported previously, banks must comply with the NSFR for all currencies and ensure that the NSFR calculation and monitoring are done separately in the domestic and foreign currencies.
The NSFR is one of the two liquidity ratios developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007–2008.
To study global best practices in NSFR implementation, the NBU has held consultations with experts from the World Bank, the European Banking Authority, and central banks of other countries.
The introduction of the NSFR comes as another important step towards bringing Ukrainian banks’ liquidity ratios into line with EU legislation and Basel Committee recommendations. Previously, the NBU has introduced the Liquidity Coverage Ratio and new standards for setting up the risk management system in Ukrainian banks to manage liquidity risk, among other things.