The National Bank of Ukraine has started publishing the Financial Stability Report. The first issue of the Financial Stability Report released by the NBU today provides insight into macroeconomic and banking sector developments and assesses their potential impact on the current situation. This analysis is at the core of the NBU’s policy aimed at ensuring financial stability.
“Ukraine has emerged from the bottom of the crisis, yet the Ukrainian financial system remains vulnerable to external shocks and internal risks,” underlined NBU Governor Ms Valeria Gontareva. “The recovery of bank lending is hampered by the heavy debt burden of enterprises, poor solvency of most economic sectors and heightened judicial risks. In view of the above, an insignificant reduction of banks’ credit portfolio is expected in 2016 (adjusted for the exchange rate effect). Overall, according to estimates by the NBU, the banking sector will remain loss-making in 2016 due to substantial allocations to loan loss provisions to cover losses from credit operations. Its return to profitability is expected no sooner than in 2017.
The Report also outlines the key tasks facing the NBU, and recommendations to be followed by banks and other government authorities, which are crucial for ensuring financial stability.
The NBU is set conduct stress tests for banks on a regular basis and alter an approach to credit risk assessment. The regulator intends to develop and approve a roadmap for the harmonization of domestic banking laws and regulations with Basel committee recommendations and EU directives.
The National Bank of Ukraine has provided banks with some recommendations. First, the NBU has advised banks to determine the actual quality of loan portfolio and set aside the required provisions, as well as to improve an internal risk management framework. Second, the NBU recommends that banks adjust their own business models to the new conditions. Third, banks are strongly advised to implement in full recapitalization plans and restructuring programs developed based on the findings of diagnostic studies.
The NBU also remains staunch in its stance, calling for the need to improve legislation. The regulator urges parliament to approve draft laws that would help spur a recovery in bank lending. In particular, these include Draft Law No. 3555 On Financial Restructuring, Draft Law No. 4004 On Restructuring the Ukrainian Citizens' Liabilities under FX Loans Extended for Purchasing the Single Residence (Mortgage Loans), as well as Draft Law No. 4529 On Amendments to Some Legislative Acts of Ukraine to Stimulate Lending in Ukraine, which would enhance the protection of creditor rights.
In addition, NBU recommends forcing the implementation of the Principles of State Banking Sector Strategic Reforming. It is better to start reforming of state banks with a change of principle of formation of banks supervisory boards and management election on a competitive basis. For that purpose, amendments must be introduced to a range of Ukrainian laws.
Publication of the Financial Stability Report is the first step towards establishment of the NBU macroprudential policy. Currently, the development of the macroprudential regulation has already commenced. In future, the NBU also plans the active use of macroprudential policy tools, which would supplement the monetary policy.