The second issue of the Financial Stability Report suggests that the systemic risks for Ukraine's financial sector subsided during 2016. The Report has assessed the systemic risks emerging from current economic and banking sector developments. The results of risk analysis will lie at the core of the NBU’s policy on ensuring the financial stability.
The macroeconomic environment was conducive to mitigating risks. Real GDP has returned to growth; headline inflation is kept under control; and the public finance deficit has narrowed significantly.
Real sector performance has improved, and corporate sector leverage has decreased to below the critical level. Some sectors - agriculture, mining and light and infrastructure industries - are already attractive for lending and have the potential to spark a recovery in lending. Banks should focus on lending to domestic-demand oriented industries, as well as profit-generating SMEs with moderate leverage.
The key risks to financial stability currently include:
- possible escalation of Russian aggression in the East of Ukraine;
- the anemic economic recovery in the major trading partners;
- the slow pace of reforms;
- a high probability of further delays in disbursements of official financing from the International Monetary Fund and other creditors.
“Ukraine's experience suggests that the termination of cooperation with international financial institutions is bound to hamper economic transformation efforts. That is why all the public authorities should see keeping the IMF program on track as their top priority,” underlined NBU Governor Ms Valeria Gontareva.
The lack of progress in ensuring the creditor right protection, implementing judiciary reform and passing much-needed laws, as well as the inconsistent actions of the law enforcement authorities pose risks to financial stability in the long term.
The banking sector has overcome the bulk of the legacy problems: the banking sector clean-up is nearing the finishing line; household and corporate deposits kept on recovering. Banks have sufficient capital and liquidity to resume lending to the economy. The NBU expects the banking sector to return to profitability in 2017 after three years of losses.
“The key risk to financial stability in the short run is possible non-compliance by a few large banks with re-capitalization programs, which were based on diagnostic studies. It will be impossible to ensure the financial sector stability in the long term without efforts by large banks to address capital shortages,” stressed the NBU Governor.
The main task for all authorities in 2017 is to ensure creditor right protection, which is essential for restarting lending. The NBU expects parliament to help banks mitigate risks and relaunch lending by passing bills on the Credit Register, restructuring of mortgage loans in foreign currency and a law on creditor rights protection as soon as possible. Reforms at state-owned banks should also be reinvigorated. Finally, the Law of Ukraine On Financial Restructuring, which would enable to restore the solvency of viable borrowers and bring the banks’ balance sheets back to health
The NBU recommends that banks move forward with the transformation of their business models to return to steady profitability and embark on preparations for the transition to IFRS 9, which would bring changes in the credit risk assessment. Banks should also focus their efforts on unwinding related-party lending in accordance with requirements set by the NBU.
The NBU has also outlined its near-term tasks and intentions.
Next year the NBU plans to move ahead with its plans to gradually ease FX regulations and proceed with liberalization of FX regulation. In Q1 2017, the NBU is going to present a draft law On Foreign Currency, which is intended to overcome the complexity and over-regulation of FX regulation in Ukraine and lay down new principles underlying a new regulation.
Throughout next year, the NBU will develop a concept for approximation of banking regulation to recommendations of Basel Committee and EU Directives.
Also, the regulator will develop a new liquidity requirement - LCR (liquidity coverage ratio), which would significantly strengthen the resilience of banks to liquidity shocks.
Finally, the NBU is set to further tighten requirements for disclosure of financial and prudential reports, which would raise the awareness of clients, analysts and media.
For reference
The Financial Stability Report is a key public document of many central banks around the world. The Financial Stability Report aims to identify risks to financial stability in Ukraine, to assess their impact on the domestic financial system and economy and offer recommendations to strengthen financial stability. The key feature of the FSR is that it focuses on risks and recommendations. The NBU publishes the report twice a year. The first issue of the Financial Stability Report was published in June 2016.