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NBU Publishes Its Approach to Stress Testing of Banks in 2019

26 February 2019

Press Release

 

The National Bank of Ukraine (the NBU) has published its approach to stress testing of banks in 2019, which is scheduled for launch in May.

 

This year, stress testing is focused on the analysis of banks’ consumer loan portfolios, which have been growing rapidly over the past two years. Currently, the risks associated with such growth are generally insignificant; however, underestimation of the credit risk by banks and a decline in the lending standards may increase the vulnerability of the banking sector. Therefore, the NBU monitors the issue regularly. The adverse scenario envisages a drastic decline in the quality of loans issued to individuals. Furthermore, for consumer loans (except mortgages) that have been nonperforming for over a year, the credit risk will be set at 100%. In addition, under the adverse scenario, assumptions about the dynamics of the interest rate spread and net interest margin will become tighter. It will be assumed that rates on loans and other exposures of banks will remain unchanged and that the value of liabilities will rise.

 

Please be reminded that stress testing is one of the multiple stages of the banks’ resilience assessment.  Scheduled for stress testing this year are 29 institutions that jointly account for 93% of the banking system’s assets.

 

As with last year, banks will be stress-tested based on the baseline and adverse macroeconomic scenarios.

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The baseline macroeconomic scenario is built around published NBU forecasts, except for the exchange rate forecast based on the consensus forecast data.

 

 

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The adverse scenario is based on hypothetical assumptions about macroeconomic indicators that drive the materialization of significant credit and market risks. More specifically, the credit risk arises from deterioration of asset quality. The market risk comprises the interest rate risk that arises from changes in the interest rate spread and net interest margin, and the FX risk associated with the effect of the hryvnia’s depreciation. 

 

The macroeconomic indicators used for this scenario do not represent the NBU’s alternative forecast. In line with international practices, assumptions about these indicators are intended to build a severe but realistic scenario under which banks would incur significant losses.

 

Detailed information about macroeconomic scenarios to be used in stress testing in 2019 is available here.

 

The NBU adheres to the approach whereby the largest corporate borrowers undergo individual stress tests: the amount of their expected credit losses will be assessed on a per-borrower basis.

 

According to the resilience assessment findings, the regulator will determine the required levels of the regulatory capital adequacy ratio (N2) and the common equity adequacy ratio (N3). Banks are required to comply with the minimum ratios under the baseline scenario (7% for N3 and 10% for N2) and with less strict requirements for said ratios under the adverse scenario (3,5% and 5%, respectively) throughout the entire three-year-long forecast period.

 

Upon completion of the resilience assessment, banks that are found to have failed to meet capital requirements will be obliged to develop and implement a capital increase plan and/or an action plan to maintain or restore their level of capital. Further information on the findings of the resilience assessment will be published in September; bank-specific data will be published on the NBU’s website in December 2019.

 

The stress testing approaches were approved by NBU Board Decision No. 157-D On Amendments to the Terms of Reference on Assessing Resilience of the Banks and the Banking System of Ukraine dated 22 February 2019.

 

For reference:

In 2018, the NBU launched the resilience assessment of banks that envisages, among other things, the stress testing of the banks that are identified by the NBU in a separate decision. The stress testing under the baseline and adverse scenarios aims to assess indicators from banks’ financial statements (balance sheets and profit and loss statements) and the required level of capital for the three years from the reporting date.


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Last modification   26.02.2019