IMF warns Ukraine against nationalizing banks for reasons outside of financial stability

MOSCOW. July 10 (Interfax) - A new risk that has emerged since the Extended Arrangement under the Extended Fund Facility (EFF) was approved in late March in the Ukrainian banking sector is excessive interference, including the prospect of nationalization for reasons outside of financial stability, which could pose risks to the banking system, the International Monetary Fund (IMF) said.

"Excessive interference on political grounds, including the prospect of nationalization for reasons outside of financial stability, could pose risks to foreign-owned banks and the banking system overall," Ukrainian media quoted the IMF's updated program after its first review, which was published last Friday.

The IMF assessed this risk as medium and recommended implementing an updated strategy for state-owned banks, including a framework to preserve value, manage, and decide the future of freshly nationalized banks.

In turn, the Ukrainian authorities noted in the updated Memorandum for Economic and Financial Policy that all their decisions "will be consistent with our overall strategy to reduce state ownership in the banking sector" and that such a framework has already been prepared.

"Any decision that has the potential to increase state ownership in the banking sector will be taken in consultation with IMF staff and be strictly limited to matters related to national security decisions during the Martial Law period and preserving financial stability," the document said.

By the time of the second review of the EFF program, which is expected to take place in late October or early November, the Ukrainian authorities will consider how to include their vision for state-owned banks and financial institutions in the Financial Sector Strategy.

The Ukrainian side also said that once the independent asset quality review (AQR) is completed, they would use its results in order to update the general strategy of state-owned banks and subsequently, strategies for individual state-owned banks, including with respect to privatization.

Currently, four state-owned banks, Privat, Oschad, Ukrexim and Ukrgas, are among the top five largest on the market in terms of assets. Their aggregate share in terms of assets amounted to 52.9% in late April and UAH 1.511 trillion in absolute terms.