NBU Council points out high systemic risk over change of functioning model for Ukrainian banking system

The Council of the National Bank of Ukraine (NBU) has pointed out high credit, currency, interest and liquidity risks along with the change of the functioning model for the country's banking system.

"With the narrowing loan portfolio banks shift their focus from performing classical banking functions to servicing financial flows of the national budget. As a consequence, interest income on government securities, rather than commission fees, is more than half of the total volume of the banking system's revenue. Shifting away from the functioning model of the banking system carries a number of risks for the further development of the financial sector of Ukraine," the council said in a report of the on the results of its meeting held on July 4.

According to the document, the change in the functioning of the Ukrainian banking system took place in the conditions of the systemic banking crisis of 2014-2016, which broke out due to existing problems in the banking system and under the influence of macroeconomic and political shocks, along with with the military conflict in the east part of the country.

At present, with stabilization of the macroeconomic and political situation in Ukraine, there are signs of increased demand for credit resources in the retail segment. In addition, economic growth forecasts give grounds to expect further revival of lending to the real economic sector.

The council said that banks' focusing on investment in government securities leads to a decrease in the lending capacity of the banking system.

"In the conditions of growing demand for credit funds, this may result in the repression of the regulated loan market by the unregulated, which by its nature is the source of financial crises," the document said.

Thus, the board summarized that the available credit, currency, interest and liquidity risks remain high and they are systemic in the banking sector.