27 Nov 2023 12:35

National Bank of Ukraine to tighten regulatory requirements for Ukrainian banks after positive assessment of their stability

MOSCOW. Nov 27 (Interfax) - The National Bank of Ukraine (NBU), after having tested the stability of the 20 largest Ukrainian banks, representing over 90% of the assets of the country's banking system, will tighten a number of its regulatory requirements for the banks.

As Ukrainian media reported citing the NBU, the results of the first stage of the assessment confirmed the central bank's expectations about the banks' abilities to evaluate the quality of loans. This allows for the restoration and introduction of new regulatory requirements for them.

"As a result of assessing the quality of assets, the total adjustment to credit risk amounted to about 1% of its volume, according to the banks. Thus, most banks are adequately assessing the potential losses of the loan portfolio and are reflecting prudential and financial provisions for loan depreciation," the NBU said.

The NBU clarified that the second and third stages of the banks' stability assessment are ongoing, with completion scheduled for December 2023.

"The preliminary results of the banks' stability assessment are optimistic: increased requirements for capital adequacy standards may arise only in relation to a few institutions, most of which already have sufficient capital reserves, including through accumulated income," the National Bank said.

The banking sector as a whole has adapted to working in conditions of conflict in the country and is showing clear signs of growth, the NBU said. According to the Banking Sector Review for Q3, corporate lending is resuming after a decline observed since February 2022, while retail lending is growing in all segments. Banks maintain high profitability indicators, ensuring further capital growth, and the growth of their capital will continue, despite the expected increase in the bank profit tax rate, the NBU said.

"Considering the preliminary results of the banks' stability assessment and the current state of the sector, the National Bank is restoring previously suspended regulatory requirements for banks and introducing new ones," the statement says.

In particular, from December 29, 2023, banks must take into account 100% of operational risk in capital adequacy standards (now it is 50%) and deduct 100% of non-core assets from capital (now 75%).

Starting January 1, 2024, high-quality liquid assets when calculating the short-term liquidity ratio (LCR) will be able to include no more than 60% of funds in correspondent accounts with other banks instead of the current 80%.

In addition, by January 1, 2024, banks must develop internal documents regarding the ICAAP process (the Internal Capital Adequacy Assessment Process for risk assessment), and by May 31, 2024, provide reports on the ICAAP process in test mode.

Next year, there are also plans to restore the determination of operational risk levels based on the updated annual financial statements for 2021-2023, the NBU said.

The National Bank said these requirements meet Ukraine's obligations to implement European Union legislation regarding capital adequacy and liquidity for financial institutions, as well as the Basel recommendations.

Based on NBU estimates, considering the preliminary results of the banks' stability assessment and the current state of the system, the existing capital reserve of most banks is sufficient to fulfill the listed requirements comfortably, despite the expected introduction of a temporary additional tax on bank income. Until banks comply with these requirements, restrictions on income distribution will remain in place.

"In the future, considering the state of the banking system and the results of the sustainability assessment, the timing and plans for activating capital buffers (conservation, systemic importance, systemic risk, and countercyclicality) will be determined. For the further harmonious and sustainable development of the sector, banks should take the results of the sustainability assessment and plans for implementing regulatory requirements into account, as well as the feasibility of updating them," the NBU said.