- The financial system efficiently transforms available funds of households and businesses into loans and investments.
- The financial system is liquid and well-capitalized, and thus is resilient to crises.
- Payments and settlements are made on time and in full.
- Financial market participants are prudent in assessing and managing risks.
- Difficulties encountered by individual financial institutions do not spread to the entire system.
A stable and effective financial system enjoying trust of individuals and businesses is essential for economic development. The NBU promotes financial stability by ensuring that the financial system functions efficiently and is resilient to crises. The regulator takes measures to minimize risks for the entire financial system and helps banks withstand systemic risks.
The NBU is constantly improving the tools it uses to ensure financial stability.
How to measure financial stability?
Monetary policy's primary objective is achieving price stability. It relies on the consumer price index to measure its progress. By contrast, macroprudential policy aims at ensuring financial stability, which is a qualitative (unquantifiable) objective and does not have universal indicators to evaluate its performance.
However, a range of indicators helps measure financial stability. These include the nonperforming loans ratio in the economy, debt burden ratios, the loan-to-value (LTV) ratio, and many more. In addition, there are integrated indicators that facilitate assessment of the state of the financial sector (e.g., the financial stress index presented in the NBU’s Financial Stability Report), although they have low predictive power.
While assessing financial stability, central banks also test the system’s resilience under various scenarios (including adverse scenarios), look into financial connections between financial institutions (with their peers and clients), and survey banks and enterprises.
Why do central banks are the ones with mandate for financial stability?
Apparently, in most countries, central banks are the regulators that command necessary knowledge, expertise, and resources (human, organizational, and financial) to promote financial stability. As a result, promoting financial stability has become part of the mandates of many central banks around the globe.
The NBU received its financial stability mandate in 2015. The Law of Ukraine On the National Bank of Ukraine empowers the NBU to promote financial stability (as the second top function after maintaining price stability).
How can a central bank promote financial stability?
The NBU can deploy a wide range of instruments to ensure financial stability. First, the NBU analyzes the data and warns banks about the risks it has identified. If the warning is not enough, the regulator can use macroprudential instruments such as capital requirements, liquidity requirements, and other (sectoral) measures.
s the use of macroprudential instruments transparent?
The NBU complies with the recommendations of the European Systemic Risk Board (ESRB) of 2013 to designated authorities on clear public identification of targets and tools for macroprudential policy. In the vast majority of European countries, macroprudential policy targets and tools have been identified and published in macroprudential strategies. In line with the European practice, the NBU has identified the policy's objectives and instruments in its Macroprudential Policy Strategy. Moreover, the NBU regularly informs the public about scheduled regulatory changes through its website and its official social media pages, as well as at meetings with the media, market participants, and experts.