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Financial Stability Council Endorses Concept of New Financial Sector Strategy, Discusses Systemic Risks

Financial Stability Council Endorses Concept of New Financial Sector Strategy, Discusses Systemic Risks

At its regular meeting on 4 May 2023, the Financial Stability Council (FSC) endorsed the concept of a new Financial Sector Development Strategy. The Memorandum of Economic and Financial Policies between Ukraine and the International Monetary Fund provides for the development of the Strategy. 

The concept envisages measures of two focus planning horizons: quick actions to stabilize and minimize the adverse effect of the war; and development steps that will change the financial sector to lay the groundwork for post-war recovery and efforts to build a new economy.

The major goals of the updated strategy will be to ensure macroeconomic and financial stability, refocus the financial system towards rebuilding the country, provide modern financial services, and regulate the financial sector effectively. 

A key element of the strategy is the assessment of the banks’ resilience. Based on its results, the NBU will identify ways to safely roll back the emergency measures taken in the earliest months of the full-scale war, and prioritize efforts to resolve NPLs.

Approval of the strategy, after processing all proposals, is scheduled for June.

During the meeting, the FSC members also considered systemic risks to the financial sector. The NBU has improved its macroeconomic forecast: the economy will grow at a higher pace than expected, and inflation will decelerate faster.

The key assumption of the forecast is that high security risks will persist until early 2024. Longer-lasting and more intense hostilities could have a significant adverse effect on economic activity and worsen inflation and exchange rate expectations.

Key risks to the forecast: 

  • emergence of additional budgetary needs and substantial quasi-fiscal deficits in the energy sector 
  • disruptions or a shutdown of the "grain corridor", and aggravation of problems arising from the restrictions imposed on imports of Ukrainian foodstuffs by some European countries 
  • further damage inflicted by russia on energy infrastructure, which could again cause substantial power shortages, restraining economic activity and exports and fueling demand for imported equipment and energy and, consequently, foreign currency
  • slower decline in global inflation than expected.

The banking system continues to operate smoothly, client deposit inflows continue to come in, the sector generated profits in Q1. At the same time, demand for loans remains weak, lending relies on state support programs. To assess the real quality of assets and capital needs, the NBU has launched a resilience assessment of the banks and the banking system, which the 20 largest banks will undergo this year. 

The participants of the meeting also reviewed the results of the working group on the domestic debt market development. A month after the group was put together, it identified its priorities and held a number of meetings with market participants: state-owned banks and subsidiaries of international banking groups. Sector dynamics indicate that positive changes have taken place in the domestic debt market.

For reference

The following FSC members participated in the meeting: Sergii Marchenko, Minister of Finance of Ukraine, Andriy Pyshnyy, NBU Governor, Svitlana Rekrut, Managing Director of the DGF, Kateryna Rozhkova, NBU First Deputy Governor, Dmytro Oliinyk, NBU Deputy Governor, Yurii Drahanchuk, Deputy Minister of Finance of Ukraine for European Integration, Rostyslav Shurma, Deputy Head of the Office of the President of Ukraine, and other heads of institutions comprising the FSC.

The FSC was established by a presidential decree in March 2015. The FSC provides a forum for the professional discussion of systemic risks to domestic financial stability.

 

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