The National Bank of Ukraine has aligned with international best practices its frameworks for counterparty eligibility in monetary policy operations and brought them into line with lender-of-last-resort operations. This will support the stable operation of the banking system and, in the long run, reduce credit risks for the NBU when using standard instruments that regulate the banking system liquidity.
The approval of the relevant amendments also means that the NBU will fulfill on time another structural benchmark under the Extended Fund Facility of the International Monetary Fund. In line with the Memorandum of Economic and Financial Policies, the deadline for the structural benchmark implementation is the end of December 2024.
The amendments cover several areas.
First, the NBU has introduced an additional criterion for banks' access to standard refinancing and direct repo transactions, which will be effective in peacetime.
The NBU will suspend a bank from participating in standard refinancing and direct repo transactions if such a bank is classified as a problem bank due to violation of the minimum value of at least one capital adequacy ratio two or more times within 30 consecutive calendar days. The additional criterion will not apply to access to overnight and/or refinancing loans with a term of up to 14 days that are taken out to finance the repayment of previously received loans in an amount not exceeding the current outstanding debt on such loans. If a bank remains classified as a problem bank for 56 consecutive calendar days for the above reasons, the NBU will suspend its access to said transactions.
The relevant provisions will take effect 60 days from the date of termination or cancellation of martial law. Both the suspension and the restriction of access to refinancing and direct repo transitions will continue until the violation is eliminated and the NBU decides to recognize the bank's activities as compliant with the law.
Additionally, in peacetime, the NBU will initiate early repayment of a bank's liabilities under refinancing loans if its access to refinancing transactions is suspended due to the bank being classified as a problem bank for the aforementioned reasons. The NBU has also established the order of priority for withdrawing assets from the bank's pool in such cases.
These changes will help reduce credit risks for the NBU when using standard instruments to regulate the banking system liquidity in peacetime. Moreover, they will encourage banks and their shareholders to comply with the operational requirements established by law. The postponing of the implementation of this provision until peacetime will help maintain the stable operation of banks classified as problem banks due to the violation of capital adequacy requirements under martial law.
Second, the NBU has aligned the terms of emergency liquidity assistance (ELA) operations with refinancing transactions under standard liquidity management instruments.
The list of eligible collateral for ELA loans has been supplemented with domestic government debt securities, which can currently be accepted as collateral only for refinancing loans. Among the standard liquidity management instruments, they are the main type of assets used by banks as collateral for such transactions.
In addition, the NBU has changed the method of determining the interest rate on ELA loans from “key policy rate + 2% per annum” to “interest rate on standing facilities to provide liquidity for the overnight term + 2% per annum.” The NBU has also defined that the term of any tranche of ELA loans shall be up to 14 days with the possibility of further extension for a maximum of 14 days. However, the total duration of any tranche, including all extensions, shall not exceed one year.
These changes will help ensure stability of the financial system in the future due to the improved efficiency of the banking system’s emergency liquidity assistance mechanism.
The above provisions were introduced by the following NBU Board Resolutions dated 26 December 2024:
- NBU Board Resolution No. 22 On Amendments to NBU Board Resolution dated 24 February 2022
- NBU Board Resolution No. 167 On Amendments to Certain Regulations of the National Bank of Ukraine
- NBU Board Resolution No. 168 On Approval of Regulation on Emergency Liquidity Assistance Provided by the National Bank of Ukraine.
The resolutions shall enter into force on 28 December 2024.