The financial sector’s uninterrupted operation, the support of lending to operating businesses, and measures to enhance monetary transmission to safeguard financial stability amid a full-scale war were the key topics the Financial Stability Council (FSC) discussed at its regular meeting on 8 December 2022.
Banking sector’s smooth operation is vital in wartime
The banking sector is maintaining its operational resilience, supporting the stable operation of its infrastructure, and ensuring payments and online services. The NBU and the banks are implementing the Power Banking project, a banking network perimeter of on-duty branches that will provide banking services during blackouts caused by the aggressor state’s terrorist attacks. The NBU has tightened the requirements for ensuring the banks’ autonomous operation, communication with clients, and security measures.
The meeting’s participants commended the Power Banking initiative and agreed to cooperate with other authorities to ensure the banks’ business continuity in an effort that will bolster the financial sector’s resilience.
Maintaining access to state support programs is key to lending
The key driver of lending amid wartime risks is making sure that the banks and borrowers can access state lending support programs, in particular the Affordable Loans 5%–7%–9% program. The design of this program needs to be revised and reviewed as new economic challenges emerge. Specifically, it is necessary to expand the range of financial instruments available to borrowers and simultaneously optimize the program’s budget. This will ease the gradual transition of the program’s borrowers to paying non-zero interest rates.
The FSC members supported the viability of improving the terms of the Affordable Loans 5%–7%–9% program through the joint efforts of the Ministry of Finance, relevant ministries, and the NBU.
In focus: enhancing monetary transmission and revitalizing the primary market for domestic government debt securities to pave the way for non-monetary financing of the budget in 2023
On the one hand, the banking system’s unprecedented structural liquidity surplus restrains the banks’ willingness to compete for depositors and makes the FX market more sensitive to ad-hoc factors. On the other hand, the liquidity excess creates room for expanding the market-based financing of the state budget through the development of the domestic debt market.
At the 8 December press briefing on monetary policy issues, the NBU announced a 5 pp increase in the required reserve ratio for hryvnia and FX current accounts. This decision comes amid a growing need to tie up excessive liquidity. At the same time, the NBU will allow banks to use benchmark domestic government debt securities to cover up to 50% of their total required reserves. The list of securities that can cover the banks’ required reserves will be determined by the NBU based on proposals from the Ministry of Finance. The Ministry of Finance, for its part, will offer benchmark domestic government debt securities at primary auctions, depending on the market situation. The supply of these securities will ensure that the budget is fully funded and that the NBU can more effectively reinforce the monetary transmission mechanism to maintain macrofinancial stability.
The meeting’s participants agreed that the revival of domestic borrowing should significantly reduce the risks of monetary financing, and pledged to agree the criteria for benchmark domestic government debt securities by 11 January 2023.
“We are grateful to the NBU for taking steps to reach a common position with the Ministry of Finance. From our perspective, we are seeing a convergence of yields in the primary and secondary markets and a growing activity in the secondary market. As a result, pricing transparency is increasing and spreads are narrowing. The IMF program has set a goal of reaching 100% rollover. Without a doubt, we will strive to meet this objective. Our common goal is non-monetary financing of the budget deficit in 2023,” said Serhii Marchenko, Minister of Finance of Ukraine.
“Today we are sending a strong signal to the market. We have outlined our new vision of measures that will help improve the transmission mechanism, jump-start the domestic borrowing market, and implement the plan hammered out while reaching the agreement with the IMF. A common position is the first strategic step. The next – tactical – step is to have a productive discussion to reconcile the criteria, parameters, and architecture of benchmark domestic government debt securities,” said NBU Governor Andriy Pyshnyy.
He also highlighted the need for state-owned banks to design deposit products that would protect retail deposits from being eroded by inflation, especially considering the unprecedented amount of social and other payments made by the Ministry of Finance to civilians and military personnel.
The FSC members also discussed certain issues of state-owned banks’ operation and heard a report by DGF representatives on measures the DGF has taken to recover the assets of insolvent banks and sue the banks’ management and former owners for damages in Ukrainian and foreign jurisdictions. Given the amount of information provided in the report, it needs to be reviewed in more detail.
The following FSC members participated in the meeting: Serhii 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, Ruslan Mahomedov, Head of the National Commission on Securities and Stock Market, Yurii Drahanchuk, Deputy Minister of Finance of Ukraine for European Integration, 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.