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Financial Stability Council Highlights Moderate Financial Sector Risks and Progress in NPL Resolution at State-Owned Banks

Financial Stability Council Highlights Moderate Financial Sector Risks and Progress in NPL Resolution at State-Owned Banks

The Financial Stability Council (FSC) held a scheduled meeting on 18 February. The agenda included several issues: implementation of NPL resolution plans by state-owned banks, progress in restructuring the debt of the Deposit Guarantee Fund (DGF), recovery from the owners of failed banks, expansion of the guarantee system to credit unions and life insurance companies.

Financial sector risks decreased significantly in H2 2020

The financial sector has come through the crisis with acceptable losses, and the majority of systemic risks are now moderate. Economic growth has been recovering since H2 2020, driven by positive momentum from foreign markets and the growth in private consumption and public infrastructure projects. The reduction in GDP in 2020 was therefore not as deep as expected at the beginning of the crisis. The economy will continue to recover in 2021.

In 2020, inflation reached the midpoint of the 5% ± 1 pp target range, but continues to accelerate. It is expected to slow in H2 2021. Going forward, the NBU’s monetary policy will pursue a balance between inflation risks and promoting economic growth.

International reserves in 2020 reached an eight-year high, exceeding the equivalent of USD 29 billion. This level enables the NBU to smooth out FX market imbalances while pursuing a flexible exchange rate policy. Corporate and retail deposits in banks are growing, while interest rates on deposits and loans remain at all-time lows.

State-owned banks reduced their NPL portfolios by 22% in 2020

The NPL ratio of state-owned banks in 2020 decreased by 7 pp, from 64% at the beginning of the year to 57% as of 1 January 2021. NPLs fell by 22%. This was facilitated by the government’s and NBU’s efforts to regulate the management of NPLs. State-owned banks are implementing the FSC-approved NPL resolution plans. The main tool used in addressing portfolio quality was the writing-off of previously provisioned NPLs: UAH 30.6 billion in hryvnia loans and an equivalent of USD 3.1 billion in FX loans were written off.

The FSC recommended that state-owned banks continue work to recover loan portfolios in 2021 and make more active use of all available tools for NPL management. The goal remains to bring the NPL ratio of the sector’s loan portfolio below 20% by 2025.

The focus is on restructuring the DGF’s debt and getting the owners of failed banks to compensate losses

The FSC members reiterated the need to implement the plan to restructure the debt the DGF owes to the state. This plan was approved in September 2020. Restructuring the DGF’s debt is a prerequisite for increasing the covered deposit amount and expanding the scope of the deposit guarantee system. This also is one of Ukraine’s commitments to the IMF.

The FSC also discussed the DGF’s work to recover insolvent banks’ assets, and highlighted the need to introduce mechanisms for voluntary settlement of insolvent banks’ debts by former owners. To make this possible, applicable laws have to be amended.

The FSC approved the concept of establishing guarantee systems for credit unions and life insurance companies

The FSC greenlighted the concept of introducing a DGF-based system to guarantee deposits of credit union members and life insurance policies. The NBU and DGF will propose possible parameters of this guarantee system to further discuss them with market participants.

For reference

The following FSC members participated in the meeting: Serhii Marchenko, Minister of Finance of Ukraine, Kyrylo Shevchenko, NBU Governor, Svitlana Rekrut, Managing Director of the DGF, Tymur Khromaiev, Head of the National Commission for State Regulation of Financial Services Markets, Kateryna Rozhkova, First Deputy Governor of the NBU, and Yurii Drahanchuk, Deputy Minister of Finance of Ukraine for European Integration.

The FSC was established by a presidential decree in March 2015.

The FSC provides a forum for professional discussion of systemic risks that pose a threat to national financial stability.

 

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