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NBU Approves Approaches to Forecasting Banks’ Performance Indicators to Set the Required Ratios of Capital Adequacy as Part of Resilience Assessment

NBU Approves Approaches to Forecasting Banks’ Performance Indicators to Set the Required Ratios of Capital Adequacy as Part of Resilience Assessment

The NBU Board has approved amendments to the Terms of Reference for Assessing the Resilience of Banks and the Banking System of Ukraine in 2023 (Terms of Reference), supplementing them with a model for calculating the banks' forecast performance indicators under the baseline macroeconomic scenario as well as parameters of the scenario.

The approved model will be used at the third stage of the resilience assessment, which will last until the end of the year. At this stage, after assessing the quality of a bank's assets and extrapolating the findings, the bank's projected performance indicators for the three years ahead will be analyzed under the baseline scenario that is consistent with the macroeconomic forecast. The use of only a baseline macroeconomic scenario in this year's resilience assessment is driven by its main objective – to make sure that after passing the peak of the crisis caused by the full-scale war and absorbing the relevant losses, banks have sufficient capital to operate in the new environment. 

The key assumption for the assessment is that banks’ balance sheets would be static over the forecast period. This means that the size of banks’ assets and liabilities remains unchanged, except as a result of provisioning or exchange rate revaluation.

This year's resilience assessment traditionally focuses on credit risk. It will be assessed individually for banks’ largest exposures based on borrowers’ debt burden. The risk for the rest of exposures will be assessed on the portfolio basis. Its materialization is modeled by assuming that a portion of loans would migrate to NPLs. The share of loans migrating to NPLs is determined based on the average estimates of probabilities of default used by financial institutions to calculate provisions in accordance with International Financial Reporting Standards.

The NBU will also assess the impact of interest rate risk and FX risk on banks. The interest rate risk will arise from a decline in interest rates over a three-year horizon, which will be faster for banks' assets and slower for banks' liabilities. FX risk will materialize through the revaluation of components of banks' balance sheets denominated in foreign currencies.

It should be noted that the baseline scenario, although based on the NBU's macroeconomic forecast, reflects benchmarks or assumptions for the purposes of resilience assessment. In particular, the UAH/USD exchange rate indicators are based on the report “CIS Plus Countries – May 2023” by Focus Economics and are not the NBU’s forecast. For more information on the assumptions of the model, visit the link.

The NBU will set the required capital adequacy ratios for banks based on the results of the resilience assessment. The banks will be given enough time to restore capital, if necessary – up to two years from the completion of the resilience assessment. According to preliminary estimates, banks will be able to rebuild capital with profits from current operations, restructuring their balance sheets, and as a result of risk mitigation.

Amendments to the Terms of Reference for the resilience assessment were approved by NBU Board Decision No. 305 dated 1 September 2023, which came into force on the date of its approval.

For reference

In order to evaluate the actual state of the banking sector, the NBU has launched an assessment of the resilience of banks and the banking system. In 2023, 20 banks that jointly account for over 90% of the banking system's assets will undergo the resilience assessment.

The NBU's resilience assessment is conducted in three stages: reviewing the quality of a bank's assets (corporate and retail loans), extrapolating findings to all lending operations of the bank (as necessary), and estimating the bank's performance indicators under the baseline scenario along with setting the required capital adequacy ratios. Assessment findings will be made public until 31 March 2024.


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