On 28 November 2016, the Governor of the National Bank of Ukraine, Ms Valeria Gontareva, held a meeting with top managers of Ukraine’s largest banks. NBU representatives at the meeting also included NBU First Deputy Governor Yakiv Smolii and Deputy Governors Roman Borysenko, Kateryna Rozhkova, Dmytro Sologub, and Oleg Churiy.
In her opening speech, the NBU Governor highlighted risks to macroeconomic stability. “It is crucial to continue cooperation with the International Monetary Fund to keep financing under the EFF program flowing to Ukraine. Without support from the IMF and other international donors, international reserves are likely to decline in 2017 when Ukraine will face external debt payments of about USD 1.6 billion and will need to repay over USD 1 billion due to the IMF under the stand-by arrangement,” said Ms Gontareva. Ms Gontareva said that without financial support from the IMF it will be impossible to secure financial stability.
Commenting on the macroeconomic situation, the central bank’s governor underlined that the NBU’s monetary policy has proved efficient in 2016. “Following the crisis of 2014-2015, in 2016, the NBU succeeded in bringing inflation down through the use of monetary policy instruments. Inflation is on course to return to the target level of 12% by the end of 2016. There is no alternative to inflation targeting since this monetary regime has already yielded the necessary results,” concluded Ms Gontareva.
The NBU Governor also said that following the meeting of the National Council of Reforms, where the NBU presented a concept paper designed to counteract the erosion of the taxable base and profit-shifting abroad (BEPS), the NBU will maintain a dialogue with the banking, expert, and business communities to work out proposals in this regard. Ms Gontareva added that, upon the initiative of the NBU, this concept paper is intended to implement the following five key recommendations out of the 15 anti-BEPS recommendations:
- introducing rules for foreign-controlled companies (require resident individuals to disclose their shares in/control over foreign companies);
- imposing limitations for expenses in related-party transactions;
- preventing the abuse of double tax treaties (DTTs);
- preventing the artificial avoidance of permanent establishment status; and
- introducing country-by-country reporting for multinational groups.
However, the implementation of these recommendations hinges on the automated exchange of tax information. Therefore, Ukraine needs to join the framework for automatic exchange of information between the tax authorities of other countries based on the Convention on Mutual Administrative Assistance in Tax Matters ratified by Ukraine.
Mr Sologub briefed the meeting participants about cooperation with the NBU Council and the efforts to draft the Monetary Policy Guidelines. “The NBU Board and Council have a common goal of putting the economy on the path of fast growth and targeting an annual GDP growth rate of 5-6%. However, the experience of other countries suggests that in the context of the structural economic crisis this goal can be achieved by maintaining macroeconomic stability, particularly price stability, which lays the foundation for further economic growth. The NBU’s monetary policy of inflation targeting and our proposals that we have submitted to the NBU Council for the Monetary Policy Guidelines over the coming years are geared toward achieving this goal,” said Mr Sologub.
Mr Sologub also presented the NBU’s estimation of the impact on inflation of the government’s initiative to raise the minimum wage to UAH 3,200. According to the NBU’s estimates, this move will lead to a 23% increase in average nominal wages in 2017. The average wages of low-paid workers are expected to increase at a strong pace, leading to higher food consumption. However, the impact on the Balance of Payments, and thus on the FX market, will be limited since households' additional income will be spent on domestically produced goods. Therefore, this government initiative will have a limited impact on inflation that is unlikely to exceed the target level of 8% +/-2 % in 2017.
In his turn, Mr Churiy briefed the meeting participants about the steps taken by the NBU to strengthen cooperation with other central banks across the world. The first meeting of the banking cooperation working group between the banking systems of Iran and Ukraine was held last week. The Ukrainian delegation was headed by NBU Deputy Governor Mr Churiy and included representatives of the Ukrainian banking community. The Iranian delegation at the meeting was represented by Vice Governor for Foreign Exchange Affairs of the CBI, Mr Gholamali Kamyab, and representatives of the Iranian banking sector. “The Resolution of the Cabinet of Ministers of Ukraine lifting restrictions on financial transactions with Iran has come into effect this month. Following the entry into force of this resolution, the NBU will bring its regulations into line with this resolution, which would allow Ukrainian banks to open correspondent accounts and carry out transactions with Iranian banks,” said Mr Churiy. Going forward, the Ukrainian-Iranian Working Group intends to explore ways to develop cooperation between the banking systems of both countries. The proposals developed by the Working Group in cooperation with experts from the Independent Association of the Banks of Ukraine will be presented to the banking community.
NBU Deputy Governor Ms Rozhkova briefed the bankers on the progress made by Ukraine's top 20 largest banks in implementing recapitalization programs. “The top 20 largest banks are on track with their recapitalization programs. The inspection is still underway at one of the banks. Twelve out of the 20 largest banks require additional capital. The deadline for this group of banks to achieve a minimum CAR of 0 percent has been extended by one month until the end of 2016, which was agreed with the IMF. Within the third group of banks comprised of 21 banks, two banks do not require additional capital, another eight banks require equity injections to meet minimum capital requirements, while eleven more banks need to address capital shortages,” said Ms Rozhkova. “Diagnostic studies of small banks will be conducted next year.”
Ms Rozhkova reminded the bankers that NBU Board Resolution No. 351 On Credit Risk Assessment, which would enable banks to conduct a full and timely credit risk assessment, will soon come into effect. Ms Rozhkova pointed out that the regulator maintains an ongoing dialogue with the banking community and considers constructive proposals from banks during the period when this regulation will be applied in test mode.
Ms Rozhkova also presented a risk-based supervisory approach that will be adopted to enhance the NBU’s capacity for high-quality banking supervision. The NBU will put a risk-based supervision approach in place, ultimately aiming to make the supervisory function commensurate with the risks facing the banking system.
In his turn, Mr Borysenko reminded meeting participants that Ukrainian banks are required to move to IFRS 9 reporting standards on 1 January 2018. “The survey suggested that over 85% of polled banks still do not have an approved plan for the transition to IFRS 9; 20% of polled banks have reviewed the classification of financial assets under business models in line with IFRS 9; 18% of polled banks have calculated loan loss provisions according to IFRS 9; and 13% of those polled have analyzed the impact of the transition to IFRS 9 on the amount of loan loss provisions. Ukrainian banks are required to adopt IFRS 9 in January 2018. The final deadline for the transition to IFRS 9 is September-October 2018. I would like to stress that the top management of banks should pay special attention to preparations for the transition to new reporting standards and include this issue on their agendas,” said Mr Borysenko.
For reference:
The NBU has held regular meetings with top managers of the 40 largest banks since 2014. These meetings are held once a month (except for summer months). The top 40 largest banks account for 96% of total banking sector assets.