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NBU adopts set of decisions to encourage involvement of the banking sector in financing projects aimed at rebuilding the country’s economy

NBU adopts set of decisions to encourage involvement of the banking sector in financing projects aimed at rebuilding the country’s economy

The National Bank of Ukraine (the NBU) has adopted a range of decisions to encourage the banking sector to take part in financing projects to rebuild the country’s economy. These steps have been taken to implement the Lending Development Strategy (the Strategy), which was developed by the NBU jointly with the Ministry of Finance and the Ministry of Economy and approved by the Financial Stability Council on 6 June 2024. The key objective of the Strategy is to bolster the banking sector’s credit support for the recovery of priority sectors of the economy under martial law. The implementation of the measures set out in the Strategy is not only a priority, but also a necessity for strengthening the financial security of the country. 

The Strategy was developed and will be implemented in the context of macrofinancial stability, which, in particular, has resulted from the imposition of effective regulatory requirements for banks. 

The NBU has approved transitional requirements for banks to gradually introduce a new capital structure and capital adequacy requirements

The NBU, continuing the implementation of EU legislation and in accordance with the Law of Ukraine No. 1587-IX, dated 30 June 2021, On Amending Certain Laws of Ukraine on Improving Corporate Governance at Banks and Other Issues of the Banking System’s Functioning, updated the minimum requirements for capital adequacy ratios under the new (three-tier) structure. Starting from 5 August 2024, banks will have to meet the following requirements:

  • common equity Tier 1 (CET1) ratio at 5.625%
  • Tier 1 ratio (Tier 1) at 7.5%
  • regulatory capital (Total capital) adequacy ratio at 10%.

The revised requirements aim to further ensure the sustainability of the banking system, protect the interests of bank depositors, and to maintain financial stability, which is an important component of the country’s defense capabilities. 

At the same time, the NBU introduced a number of transitional provisions to balance the implementation of European requirements against preserving the banking system’s ability to continue to ramp up credit support for the economy. These provisions envisage:

  • applying a phased schedule for meeting the minimum regulatory capital adequacy ratio:
    • from 5 August 2024 to 31 December 2024, no less than 8.5%
    • from 1 January 2025 to 30 June 2025, no less than 9.25%
    • from 1 July 2025, no less than 10%
  • allowing banks to include in their common equity Tier 1:
    • the profit for H1 2024 and the first nine months of 2024 without prior approval of the NBU, and a review of interim financial statements. That said, the amount of profit must be reduced by the amount of dividends earmarked for distribution out on this profit, and the period for including this profit in the capital is limited to the date of the annual general meeting for 2024.
    • funds that banks receive as payment for ordinary shares or use to increase their face value. Banks can include these funds in their capital during 2024, which will help to complete measures to inject additional capital that have already been started by banks.
  • allowing banks to include in their additional Tier 1 and Tier 2 capital instruments subject to write-off/conversion and subordinated debt for the period of the NBU’s approval procedures, in accordance with the documents submitted by the banks.

The NBU’s introduction of these transitional provisions ensures a proper balance between regulatory requirements aimed at safeguarding financial stability and the implementation of measures set forth in the Lending Development Strategy. These transitional provisions preserve the banks’ capital, which is necessary to cover war-time risks and to protect the interests of depositors. At the same time, taking into account the transitional provisions, the banks’ potential to expand their loan portfolios will increase by one-and-a-half times compared to their current potential. 

The NBU has also introduced temporary special rules for measuring credit risk from specialized loans

The NBU has introduced special rules for measuring credit risk from specialized loans for the period of martial law and one year after its termination or cancellation. In doing this, the NBU was guided by the Strategy measures to boost the launch and implementation of new projects involving loans, including in the priority sectors of the economy (the defense industry, the energy sector, manufacturing, and agriculture), and to encourage the banking sector to finance the rebuilding of energy facilities. 

The new rules:

  • adapted the mechanisms for measuring credit risk from specialized loans granted in such areas as project and facility financing (lending). In particular, banks were allowed to:
    • include in the calculation of the project originator participation ratio funds raised from the project investor on a repayable basis, without limiting their amount in the case of a proper subordination of funds
    • classify a loan as a specialized loan if there is no collateral of corporate rights and if there are high quality guarantees, as well as if a special purpose vehicle implementing the project has income from sources other than the project, as confirmed by the company’s reporting
    • based on the judgment not to downgrade the assessment of the level of credit risk of the borrower of specialized loans in the case of the deterioration of certain financial indicators
    • to evaluate a specialized loan using a special approach throughout the life of the project
  • the NBU decreased haircuts for collateral in the form of equipment intended for use/operation in the energy sector and distributed energy generation (0.1 if such equipment was accepted as collateral under trust property rights; and 0.25 if such equipment is accepted as collateral). The banks will be allowed to apply such lower haircuts to loans granted after 1 June 2024 for the purchase of equipment intended for use/operation in the energy sector and distributed energy generation.

In addition, the NBU has expanded the list of exceptions to the established prohibitions, which will allow banks to conduct asset transactions with related-party leasing companies that are part of the same banking group as the bank.

The introduction of these rules will help expand credit support for the Ukrainian economy, including financing for priority sectors, as it will:

  • ensure there is impetus for the development of specialized lending (project and facility financing), including for the rapid rebuilding of energy infrastructure
  • enhance the affordability of loans, in particular for households and SMEs, for the purchase of equipment for the creation of distributed energy generation, and
  • boost lending to agricultural companies.

The above-mentioned decisions of the NBU establish the necessary preconditions in the financial sector for the implementation of the Strategy. At the same time, the success of its implementation largely depends on the coordinated actions and the effectiveness of the decisions of all participants.

The relevant decisions were approved by resolutions of the Board of the National Bank of Ukraine:

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