On 31 January 2017, the Financial Stability Council (the FSC) held its first meeting this year with the participation of the Council's Co-Chairs Ukraine’s Finance Minister Mr Oleksandr Danyliuk and NBU Governor Ms Valeria Gontareva.
The meeting participants noted an improvement in the macroeconomic conditions under which the financial sector operates and the acceleration of economic growth. However, the additional inflation risks have emerged, bringing the NBU’s current 2017 year-end inflation forecast of 9.1% closer to the upper band of the target range of 8% +/-2 pp. However, the fiscal policy will remain prudent, while the fiscal deficit will stay within the agreed targets. Following a period of heightened volatility in December-January, the hryvnia exchange rate stabilized. Going forward throughout 2017, moderate exchange rate volatility will be underpinned by fundamental factors. The meeting participants also pointed to the heightened risks stemming from a renewed flare-up of hostilities in the east of Ukraine.
The operation of state-owned banks was central on the agenda of the FSC meeting.
The Asset Quality Review conducted by the NBU in January 2017 for Ukreximbank and Oschadbank identified a deterioration in the quality of loans during 2016. Large borrowers’ debt-servicing discipline deteriorated significantly, while some companies suspended debt servicing on loans. As a result, banks' additional capital needs increased in 2017. The final capital needs will be determined by taking into account possible positive effects from a partial debt restructuring implemented in accordance with the law On Financial Restructuring. Currently, the state-banks comply with minimum regulatory capital requirements set by the NBU.
The meeting participants agreed to revise and update the development strategy for state-owned banks. As a side note, the framework for making strategic reforms of the state-owned banking sector was approved by a respective decision of the Cabinet of Ministers of Ukraine in February 2016. Following the transfer of CB PrivatBank PJSC to state ownership, the share of state-owned banks in the banking sector exceeded 50%, prompting the need to update the aforementioned document.
The Ministry of Finance also informed the meeting participants that a draft law providing for substantial changes in corporate governance standards for state-owned banks through the establishment of independent supervisory boards. This draft law will be submitted to parliament for consideration in the coming weeks.
In addition, the meeting participants discussed the development of the life insurance market, which is a part of the pension scheme in Ukraine. This segment of the insurance market is currently narrow and its ability to provide a long-term resource base for the financial sector is limited. At the same time, the quality of assets of key market participants is high. The FSC decided to contribute to efforts to implement the initiatives proposed by the National Commission for the State Regulation of Financial Services Markets, which would boost the growth potential of the life insurance market and enhance the protection of consumer rights.