Financial Stability Council Highlights Risks of Tax Hike on Banks, Approves Regulation Concept for Virtual Assets Market

At its 30 October meeting, the Financial Stability Council (FSC) passed a number of important decisions to enable the further development of the financial sector and to minimize risks it faces amid the full-scale war.

First, the FSC members heard and discussed the NBU’s overview of systemic risks in the financial sector. The course of the full-scale war continues to be the key risk. It includes the war’s drag on economic growth – made heavier in recent months by russia’s destruction of Ukraine’s energy infrastructure – and the resulting emergence of additional budget needs. Despite the risks, the banks are scaling up their loan portfolios, and the economy’s loan penetration rate is rising. However, there still exists a need for more active lending, in particular to restore infrastructure and strengthen defense capabilities and resilience.

The FSC members paid attention to information about possible ways to mitigate the risks associated with financing the state budget, as well as overall systemic risks, and agreed to respond as needed.

On a separate note, the FSC looked into an elevated 50% tax rate that could potentially be imposed on bank profits in 2026. The FSC members agreed both with the assessment that the fiscal effect of such a hike would likely be significantly lower than publicly communicated and with the range of risks posed by its implementation:

• constraints on the banks’ lending and investment potential, which is vital for further supporting the growing financing needs of key industries, primarily the energy sector and the military-industrial complex
• threat of complications during the privatization of state-owned banks, and failure by some of them to meet deadlines for implementing capitalization programs based on the results of the resilience assessment
• limitation of the banks’ capability to stay resilient in wartime, support the Power Banking network, keep up the fight against unproductive capital outflows, and do more
• difficulty ensuring timely compliance with capital requirements as per EU standards
• breach of commitments outlined in the Memorandum of Economic and Financial Policies with the IMF
• deterioration of incentives for unshadowing the economy.

The FSC members also discussed the concept of regulating the virtual assets market, including the distribution of powers between regulators and the stages in which to launch the market itself. In addition, the FSC members coordinated their positions for further processing the relevant draft law in the Verkhovna Rada. According to the proposed concept, before the draft law can pass a second reading, it should contain a clear definition of regulators and their distribution of powers and specify a transition period long enough to create new infrastructure and develop a by-law framework.