Interview with Rozhkova about the everyday life of the financial system
On November 1, the first deputy head of the NBU, Katerina Rozhkova, headed a new vertical — Financial stability . This is another milestone in her career at the National Bank already under the fourth head, Andrey Pyshny.
Rozhkova calls the new head of the National Bank a strong leader with whom it will be possible to strengthen the NBU and “return what was lost.”
The central bank really faces big challenges – the stability of the financial sector during the war, and now even in the absence of electricity, stability hryvnia and the foreign exchange market, negotiations with the IMF, activation of the government bonds market, and so on.
Ekaterina Rozhkova spoke about the main challenges, changes in the NBU under the new head, and the fate of the long-suffering Alfa-Bank in an interview with LIGA.net . We bring to your attention Rozhkova's interview
Interview with Rozhkova about the everyday life of the financial system
Recently, the National Bank headed a new head, has the work of the institution changed with him?
Yes, it has. In order for the decisions of the National Bank to be as accurate and correct as possible, it is very important that a team of professionals work, who must and can express their independent opinion. Truly collegial bodies should work, then in the course of the discussion the only right decision at that time is born.
Collegiality, independence of opinion and professionalism are incompatible with autocracy, they are dying.
For me, the ideal set is a strong professional team, collegiality, transparency in decision-making, as well as a strong and intelligent leader with a strategic vision of the goal.
Then the team strengthens the leader, and the leader strengthens the team. Today, the leader has such a vision.
I hope that now we will be able not only to restore what we have lost in previous years, but also to strengthen the National Bank as an institution.
What have you lost?
We have lost certain professionalism, we have lost people, we have lost internal processes.
As for autocracy. When the head of the NBU was replaced, the communications department was headed by a person who worked at Oschadbank with Mr. Pyshny, the security department was headed by the same person, and the legal department, and the newly appointed member of the NBU Council also worked at Oschadbank during the time of the new head of the National Bank. Does this trend scare you?
My approach has never changed – you need to hire professional people. We interviewed, there were other candidates, and I can clearly tell you: I don’t care where they worked.
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 also recently headed the new Financial Stability vertical. What do you do? What are the main tasks?
Ensuring financial stability is one of the key functions of the National Bank. It appeared as a result of the reform of the financial sector in 2015.
This vertical, in addition to the Financial Stability Department, includes the departments of banking methodology and methodology of the non-banking financial sector. From my point of view, this triad is the perfect combination.
Its task is to analyze the state of the financial market, existing and potential risks, and propose mechanisms that reduce their negative impact.
Given the long nature of the war, both the ability of banks to restore capital and the restructuring of banking strategies are important: from survival to strategies for actively supporting the economy during the war and development during the period of the country's recovery after the victory.
In this sense, banks need to catch up with businesses that have adapted to work in wartime conditions. We will focus our efforts on this.
Interview with Rozhkova about the everyday life of the financial system
Now the number of banks with operating losses, non-performing loans, problems with capital has increased. How long can the system survive and wait for the end of the war?
The system is stable, the stress test, which we have been passing with the banks for the tenth month, allows us to say that we are working stably. We also see what needs to be improved.
The continuity of the banking system was ensured — it did not stop even for a minute after the start of a full-scale invasion. This is the access of citizens to savings, maintenance of the economy, the budget.
Second. Financial stability of banks. When we made preliminary assessments, we assumed that as a result of the war, the banking system would lose at least 20% of the working loan portfolio, which is almost comparable to the regulatory capital of banks.
Given the energy terror of the aggressor country, business losses and, accordingly, the banking system may be even larger. But we have postponed until the post-war period the application of sanctions for the loss of capital.
Despite the fact that banks have already formed more than UAH 100 billion of reserves, in our opinion, this is still an insufficient amount that does not fully reflect the level of credit risk. By forming reserves, banks fix losses that have already occurred, but they do not reflect potential losses very actively, so we expect that the formation of reserves will continue.
However, most banks, in particular systemically important ones, have quite effective business models and even in war conditions, they generate a positive operating result, which partially compensates for losses from credit risk.
Therefore, despite the current and potential losses of capital, we expect that after the victory they will be able to independently restore capital through their normal activities (fee income, resumption of lending).
And what will happen next year ?
In order to understand the real state of affairs in 2023, we will conduct diagnostics of banks: asset quality assessment and stress testing, assess the viability of banking business models.
After that, we will be able to offer certain solutions and tools both for the restoration of capital and for working with problem loans. But today we can already say that the recovery period of the banking sector will last more than a year.
Obviously, changes in legislation are needed to resolve the issue of banks' capital and expand their capabilities to restructure business and household loans.
p>
We are also working with our international partners on the concept of a platform for attracting investments to restore businesses affected by the war. If the business recovers, the economy will recover, the ability of the business to service bank loans will recover, which means that bank capital will recover. ” title=”Rozhkova's interview about the everyday life of the financial system” width=”4675″ height=”3117″ alt=”” />
Rozhkova's interview about the everyday life of the financial system
We are now seeing the loss of capital by banks on the one hand, and on the other, a high level of liquidity. There are already about UAH 400 billion on certificates of deposit. What to do with them? Banks are not very willing to invest them somewhere.
To understand what to do, you need to decide on the reasons why this is happening.
The first source of liquidity is payments from the budget. Our budget now is the war budget. That is, the money goes mainly to defense needs, social benefits, medicine.
Where does this money come from? Let's take 2022: $28.5 billion – external assistance from partners, UAH 385 billion – NBU issue. These are funds that came into the banking system from outside, not through the redistribution of public finances and not through the channel of borrowing in the domestic government bonds market.
Secondly, lending was suppressed during the war. This is understandable, because demand has decreased, credit risks have increased significantly, and banks' risk appetite has decreased.
By the way, liquidity growth occurs not only at the expense of the population, but also at the expense of legal entities. Production volumes have fallen, investments are not being made, enterprises have free funds, the need for additional working capital has decreased.
The demand of individual industries (the agricultural sector, critical infrastructure enterprises) is satisfied mainly through state programs or support from international partners.
The resumption of lending is possible only if the economy recovers, demand grows and the level of credit risks decreases. It all depends on the security situation.
Therefore, on the one hand, there is an unprecedented influx of external liquidity into the system, on the other hand, a significant narrowing of the directions for investing these funds. So the behavior of banks is understandable.
But we are not satisfied that the certificate of deposit has become the main banking operation, and there is no competition for household deposits, deposit rates are growing very slowly, and the primary market for government bonds is practically absent.</p
Additional mechanisms are required [to change this]. One of them is our decision to increase the required reserve ratios for banks on current accounts by 5% with the possibility of covering up to 50% of these reserves at the expense of government bonds.
This is about UAH 50 billion according to the system, which should migrate to reserves. This means that banks will not be able to invest these funds in certificates of deposit. You will say that this is not enough, because there are 400 billion in depsertificates, and I agree with you.
Do I need to increase further? My opinion is yes. But let's see how this mechanism works.
At the same time, the attractiveness of government securities should be increased by bringing the levels of return on the primary and secondary markets closer. And the Ministry of Finance is gradually doing this.
How did you persuade Mr. [Finance Minister Sergei] Marchenko to do this?
No one persuaded anyone, this is the result 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 raise rates on term deposits so that balances from current accounts flow to term ones, or to form reserves by buying government bonds. At the same time, the increase in government bonds rates by the Ministry of Finance will help 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 an absolute priority for us. The approval by the IMF Board of Directors of the monitoring program for Ukraine is a clear evidence 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 provides for the fulfillment by Ukraine of certain requirements in order to talk about an expanded funding program.
For international partners, it is important to understand some kind of starting point. Therefore, this program provides for budget parameters, in particular, the budget deficit for the next year. This will allow our partners to consolidate and help us finance it.
The program also contains 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 account for government bonds in mandatory reserves. The Ministry of Finance is gradually raising 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, in particular, 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.
Pavel Kalashnik
DOSIER: Who can head Oschadbank: what is known about Kirill Shevchenko
Andrey Pyshny. Kum Yatsenyuk and the killer of Oschadbank
Two versions of why Ekaterina Rozhkova decided to sue the NBU
The future deputy head of the National Bank Ekaterina Rozhkova has a dubious past
Deputy head of the NBU Rozhkov for state bank funds “bleach” the reputation
1.5 billion fraud: why is Rozhkova not responsible for the bankruptcy of Platinum Bank?
