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The authorities explains why they consider the financial situation in Ukraine stable

The Financial Stability Council assessed the situation in Ukraine. Photo: NBU

The Financial Stability Council assessed the situation in Ukraine. Photo: NBU

At a meeting held on October 12, the Financial Stability Council concluded that at the moment there were no significant threats to the stability of the financial situation in Ukraine. This is stated in a joint press release of the Ministry of Finance and the NBU, published on October 19.

Factors stabilizing financial situation

In the first half of the year, economic recovery was weaker than expected, but in the Q3, economic activity increased amid strong demand, favorable terms of trade, and a significant harvest.

Thanks to receipts from the IMF, Ukraine successfully passed the period of peak payments on external debts in September. The revaluation pressure dominates in the foreign exchange market.

The growth of deposits in banks continues. As of the end of September, hryvnia business funds increased by 28% on an annualized basis, that of the population—by 15%. Banks are actively lending to businesses and the population: the growth rate of corporate loans in hryvnia exceeds 40%, the growth of retail loans in hryvnia is about 30%.

Banks are predominantly stable and well capitalized, as demonstrated by stress testing results.

The banking system has decreased the rate of non-performing loans (NPL) to 35%. State-owned banks showed the greatest effect, having reduced their NPL portfolio by 108 billion UAH, which is almost 80% of the total reduction.

The Deposit Guarantee Fund (DGF) is actively working to reimburse the losses by the owners and managers of bankrupt banks and to return the assets of such banks.

Remaining risks to financial stability

Inflation remains considerably above the target. Its slowdown is expected from the Q4, returning to the target level of 5%—in the second half of 2022.

Banks in courts often fail to prove their case in disputes with borrowers. The DGF faces similar difficulties in courts in cases involving returning assets of bankrupt banks.

What is the Financial Stability Council

The Financial Stability Council was established in March 2015 by Decree of the President of Ukraine. Its decisions are advisory. The main functions of the Council are the following:

  • identification, analysis, and assessment of systemic risks and threats to the financial stability;
  • preparation of recommendations to minimize the systemic risks;
  • agreeing on measures to prevent crises and respond quickly to them;
  • coordination of cooperation between government agencies that impact financial stability.

The Council is co-chaired by the Governor of the NBU and the Minister of Finance. Its composition includes: Chairperson of the National Commission on Securities and Stock Market, Managing Director of the DGF, two Deputy Governors of the NBU, Deputy Ministers of Finance, and the Head of the Office of the President.

How the National Bank assesses the financial stability

The NBU publishes the Financial Stability Report twice a year (in June and December).

The subject of the most recent report (June-2021) was the dynamics and results of the post-crisis recovery of the financial sector. The report notes that the Ukrainian banking sector is highly profitable and well capitalized. Banks have adapted to quarantine conditions and are increasing lending in the retail and corporate segments.

On the updated risk map, the assessment of most of them remained unchanged. The macroeconomic risk, which had returned to the pre-crisis level, and the credit risk of the corporate sector decreased.

Карта рисков финансового сектора

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Тепловая карта рисков финансового сектора

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How financial stability is measured

Financial stability work relies heavily on quality (that is, non-quantifiable) goals and does not have common indicators to measure them.

There are indicators that allow experts to indirectly assess the level of financial stability, for instance: the level of non-performing loans, debt burden ratios, the ratio of loans given to the value of collateral, etc.

There are also complex indicators that allow you to assess the current situation in the financial sector, for instance, the Financial Stress Index that is monitored in the financial stability reports of the NBU.

To assess financial stability, central banks also measure the stability of the system under various scenarios, examine the financial relationships of banks (with other financial institutions and clients), and poll banks and companies.

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