The latest Financial Stability Report focuses on the risks and threats caused by russia’s military aggression has posed and on efforts to maintain financial sector stability. Russia’s full-scale war on Ukraine has triggered a deep crisis that will have far-reaching consequences for the financial sector. As a result of the war, GDP will fall by more than one-third, and inflation will increase to many times its target level.
Uncontrolled depreciation has been avoided due to the temporary fixing of the exchange rate. At the same time, pressure on the FX market persists. The NBU has been intervening in the market by selling large amounts of foreign currency to smooth out exchange rate fluctuations. The NBU has also sharply hiked its key policy rate in June to make hryvnia deposits more attractive and ease pressure on the FX market, among other things. This decision further encourages the banks to raise interest rates on deposits. The yield on domestic government debt securities should also increase.
The banks came into the crisis with significant capital and liquidity. In the lead-up to the invasion, they were operationally stable and efficient, and had contingency plans ready. Depositors have retained confidence in the banks: in the earliest weeks of the war, retail and corporate deposits actually increased. However, the growth in deposits has by now stopped. Although banking sector liquidity is not a concern at this point, liquidity risk cannot be ignored, as it can still materialize during the war.
Even as the war drags on, the banks continue to lend, but only certain businesses and sectors, including agriculture, need a funding boost. Given the uncertain macroeconomic conditions and financial standing of borrowers, large-scale corporate lending is only possible if the government expands its support programs.
Credit risk is currently key for the banks, and its materialization is the biggest threat to the sector. Financial institutions have slowly begun to recognize incurred and expected losses. For the first time in five years, the banking sector has become loss-making as provisioning has spiked. The banks stand to lose at least 20% of their loan portfolio due to the war and the economic crisis, the NBU estimates.
Such losses will have a significant impact on the banks’ capital adequacy. With this in mind, the NBU will pursue a policy of regulatory easing to help the banks come through the crisis. From late July, the NBU will decrease the risk weights for unsecured consumer loans to 100% from 150%. The banks will be able to use the accumulated capital to cover credit losses.
Most financial institutions have sufficient capital to cover significant losses from credit risk, according to the NBU. Efforts to maintain operating profitability will allow the banks to recover capital on their own after the current crisis bottoms out. The NBU will give the banks enough time to prepare and implement their recovery plans. Further actions of the regulator will depend on market developments.
Nonbank financial institutions (NBFIs) have found it harder to cope with operational risk than the banks have. However, there still are players in every segment that continue to provide quality services.
Transparency in reflecting the financial standing of the banks and NBFIs will be the key to a rapid recovery of the financial system after the crisis. With sufficient information on the sector’s development, the NBU will be able to respond more effectively to current challenges and ensure financial stability.