Rozhkova's conversation about the day-to-day operations of the financial system
On November 1, Katerina Rozhkova, the first deputy head of the NBU, started leading a new area called Financial stability. This is a significant step in her career at the National Bank, as she has worked under the leadership of the fourth head, Andrey Pyshny.
Rozhkova describes the new head of the National Bank as a powerful leader who can help strengthen the NBU and regain what was lost.
The central bank is facing major challenges such as maintaining stability in the financial sector during the war, and now, even in the absence of electricity, ensuring stability in the hryvnia and the foreign exchange market, negotiating with the IMF, activating the government bonds market, and more.
Ekaterina Rozhkova discussed the main challenges and changes in the NBU under the new leadership, as well as the situation of Alfa-Bank in an interview with LIGA.net. We present Rozhkova's interview to you.
Rozhkova's conversation about the day-to-day operations of the financial system
Recently, a new head took charge at the National Bank. Has this changed the institution's operations?
Yes, it has. In order for the National Bank's decisions to be accurate and sound, it is crucial to have a team of professionals who can express their independent opinions. Genuine collaborative efforts should be in place to ensure that the best decision is made through discussion.
Collaboration, independent viewpoints, and professionalism cannot coexist with autocracy, as they will be compromised.
In my view, the ideal scenario is to have a strong professional team, collaboration, transparent decision-making, and a strong and visionary leader.
In this way, the team supports the leader, and the leader bolsters the team. Currently, the leader has such a vision.
I am hopeful that we will not only be able to recover what we have lost in previous years, but also strengthen the National Bank as an institution.
What have you lost?
We have lost certain levels of professionalism, personnel, and internal processes.
As for autocracy. When the head of the NBU changed, the communications department, security department, legal department, and a newly appointed NBU Council member all previously worked at Oschadbank with Mr. Pyshny. Does this trend concern you?
My approach has always been the same – it is important to hire talented individuals. We conducted interviews and there were other candidates, and I can assertively state that I am not concerned about their previous workplaces.
The main thing is that they are professional, they understand what needs to be done, they share the values, which the NBU has. It would scare me if non-professionals were hired.
You have recently taken on the responsibility of overseeing the new Financial Stability vertical. What are your tasks and main responsibilities?
Ensuring financial stability is one of the principal functions of the National Bank, and it emerged as a result of the financial sector reform in 2015.
In addition to the Financial Stability Department, this vertical includes the banking methodology and non-banking financial sector methodology departments. In my opinion, this combination is ideal.
Its job is to examine the condition of the financial market, the current and possible risks, and suggest ways to reduce their negative impact.
Because the war is expected to last a long time, it's important to consider the banks' ability to rebuild their capital and restructure their strategies. This includes shifting from survival to actively supporting the economy during the war and facilitating growth during the country's recovery after the war.
Banks need to catch up with businesses that have adapted to operating in wartime conditions. Our efforts will be focused on this.
Interview with Rozhkova about the daily life of the financial system
There has been an increase in the number of banks experiencing operating losses, non-performing loans, and capital issues. The question arises: How long can the system endure and wait for the war to end?
The system is secure. The stress test, which we have been conducting with the banks for ten months, indicates that we are operating securely. We also see areas for improvement.
The banking system's continuity was ensured — it did not halt even for a minute following the start of a full-scale invasion. This includes citizens' access to savings, the maintenance of the economy, and the budget.
Second. Financial stability of banks. When we conducted preliminary assessments, we anticipated that due to the war, the banking system could lose up to 20% of the working loan portfolio, which is almost equal to the banks' regulatory capital.
Considering the aggressor country's energy terror, business losses, and consequently, potential greater impact on the banking system. However, we have delayed the application of sanctions for the loss of capital until the post-war period.
Even though banks have already set aside over UAH 100 billion, in our view, this amount is still not sufficient to fully reflect the level of credit risk. By setting aside reserves, banks record existing losses, but they are not actively reflecting potential losses, so we anticipate the reserves will need to continue growing.
Nonetheless, most banks, especially those deemed systemically important, have effective business models and continue to generate positive operating results, even in war conditions, partially offsetting credit risk losses.
As a result, despite current and potential capital losses, we anticipate that after the war, banks will be able to independently rebuild their capital through their regular activities (such as fee income and resuming lending).
And what will occur next year?
To understand the real situation in 2023, we will assess banks by examining the quality of their assets and conducting stress tests, as well as evaluating the viability of their business models.
Following this, we will be able to propose solutions and tools for rebuilding capital and dealing with problematic loans. However, we can already say that the recovery period for the banking sector will last more than a year.
Clearly, changes in legislation are necessary to address the issue of banks' capital and expand their ability to restructure business and household loans.
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We are also collaborating with our international partners on the idea of a platform to attract investments for restoring businesses impacted by the war. If the business bounces back, the economy will too, and the business's ability to repay bank loans will improve, which means that bank capital will also improve.
Rozhkova's interview about the everyday life of the financial system
We are now witnessing banks losing money on one side, and having a lot of available cash on the other. There is currently about UAH 400 billion in certificates of deposit. What should banks do with this money? They are not very eager to invest it elsewhere.
To figure out what to do, we need to determine the reasons for why this is happening.
The main source of available cash is funds from the budget. Our budget is currently focused on the war, so the money is mainly going to defense needs, social benefits, and medicine.
Where is this money coming from? In 2022, it's $28.5 billion from foreign assistance, and UAH 385 billion from the National Bank of Ukraine. These funds entered the banking system from external sources, not through the redistribution of public funds or borrowing in the domestic government bonds market.
Additionally, lending has decreased during the war because demand has dropped, credit risks have risen sharply, and banks are less willing to take risks.
Liquidity growth is happening not only due to the public, but also due to businesses. Production levels have fallen, investments are not being made, and companies have excess funds, reducing the need for additional working capital.
The demand of certain industries (like agriculture, critical infrastructure enterprises) is mainly met through state programs or support from international partners.
The prospect of lending again depends on the economy recovering, demand increasing, and credit risks diminishing. It all hinges on the security situation.
So, there is an unprecedented inflow of external cash into the system, but fewer options for investing these funds. Therefore, banks' actions are understandable.
However, it's concerning that certificates of deposit have become the main banking operation, and there is little competition for household deposits. Deposit rates are increasing very slowly, and the primary market for government bonds is nearly non-existent.
More measures are needed to address this. One of them is our decision to raise the required reserve ratios for banks on current accounts by 5%, with the possibility of covering up to 50% of these reserves with government bonds.
About UAH 50 billion in the system should move to reserves, which means banks won't be able to invest these funds in certificates of deposit. One might say this is not enough, considering there are UAH 400 billion in certificates, and I agree.
Do I need to increase more? In my opinion, yes. But let's see how this mechanism operates.
At the same time, the appeal of government securities should be enhanced by bringing the levels of return on the primary and secondary markets closer. And the Ministry of Finance is gradually working on this.
How did you convince Mr. [Finance Minister Sergei] Marchenko to do this?
No one convinced anyone, this is the outcome of a joint discussion, teamwork and shared vision: we have a problem, what can we do and what can you do?
We can increase reservation standards. This is not the first step of the NBU to speed up the transmission and not the last one. We do not rule out that we will continue to raise the required reserve rate.
And banks will have a choice: to increase rates on term deposits so that balances from current accounts flow to term ones, or to form reserves by purchasing government bonds. Meanwhile, the increase in government bonds rates by the Ministry of Finance will assist us with the transmission mechanism. Because it is teamwork.
With the change of the head of the NBU, our cooperation with the Ministry of Finance was restarted. I hope that the problems in interaction that complicated coordination are a thing of the past. Conceptually, we have no disagreements.
How are the negotiations with the International Monetary Fund going now? Little is known about them. What are the requirements of the IMF?
There is no secret here: when any program with the IMF begins, the parameters of the program are agreed upon, they must be approved by the Board of Directors of the Fund, after which the IMF publishes the program. Until then, no one has the right to talk in detail about the documents.
The resumption of cooperation with the IMF is a top priority for us. The approval by the IMF Board of Directors of the monitoring program for Ukraine is a clear indication of the unprecedented support of international partners for the efforts we are making to maintain macro-financial stability.
The monitoring program will not be too long. It involves Ukraine fulfilling certain requirements in order to discuss an expanded funding program.
For international partners, it is important to understand some kind of starting point. Therefore, this program includes budget parameters, particularly the budget deficit for the next year. This will allow our partners to unite and support us in financing it.
The program also includes some steps that we have to take with the Ministry of Finance to revive the primary government bonds market.
We have taken one step – we have made a decision to consider government bonds in mandatory reserves. The Ministry of Finance is gradually increasing rates. We need to restore the ability to attract the necessary volumes to finance the budget deficit in the domestic market by selling government bonds to a wide range of banks on market terms.
Next point: financial stability. We must develop and agree with the IMF a methodology for stress testing banks, conduct stress testing and, based on the results, develop a strategy for the development of the sector, taking into account the need to restore capital.
Also in the focus of attention are issues of corporate governance in the public sector, particularly in state-owned banks. Despite the war, we must ensure that corporate governance in the public sector remains at least at the level we have achieved.
In the second part of the interview with Kateryna Rozhkova, we talked about the stability of the hryvnia, the work of banks during possible blackouts and about the fate of Alfa-Bank, whose shareholders remain Russian oligarchs. Read on December 25.
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