- NBU introduces a new bank emergency financing facility
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NBU introduces a new bank emergency financing facility
The National Bank of Ukraine as the lender of last resort introduces a new liquidity management instrument – Emergency liquidity assistance (ELA), according to a resolution of the NBU Board from December 15, 2016. The new tool is intended to help solvent banks with substantial influence on the banking system to meet temporary liquidity shortages, according to the NBU statement. Emergency liquidity assistance of the regulator under this facility is provided to banks, after they have exhausted all other available means of liquidity support, including shareholders’ bailout, as well as standard refinancing instruments offered by the interbank market and the Central Bank. The new tool “will contribute to the financial system stability as it will enable the NBU to support solvent banks’ liquidity by providing a prompt access to loans,” NBU Deputy Governor Mr Oleg Churiy commented on the ruling. The funding from the NBU facility should help banks meet their commitments before depositors and other creditors (except related parties), the NBU resolution reads, and can be used neither in financing banks’ business operations, nor in handling banks’ structural problems. ELA loans cannot be invested in banks’ equity or in recapitalization as well. In order to benefit from the new facility, banks should demonstrate sound liquidity prospects, be in compliance with their recapitalization schedule, and present a financial model which mirrors their capacity to repay the loan afterwards, including a cash flow projection. In order for the ELA loan to be disbursed in time in case of emergency, banks should prepare an emergency strategy policy beforehand, among others, devising a contingency plan of actions in case of emergency (contingency planning), and enter into a yearly general agreement on ELA with the NBU, containing the terms and conditions for the disbursement and repayment of the NBU loan, as well as some covenants on transactions and investments. The ELA loans are extended for a term of up to 90 days in several installments at a rate equal to NBU reference rate plus 2% per annum, with possibility of prolongation for another 90 days, according to the statement. The resolution comes into effect from December, 16 2016. The NBU regulation regarding the extension of stabilization loans to banks, introduced in 2010, is terminated from the effective day of the new enactment.
The adoption of the new bank regulation is a POSITIVE step towards transparency in NBU refinancing policy. The new facility should help avoiding the weaknesses of the refinancing practice of the regulator, which have frequently impacted negatively upon the country’s foreign exchange, money market, and financial account balance in the past, while resulting in misuse of NBU funds by banks’ owners and management. Additionally, the adoption of the new regulation should allow more swiftly handling emerging liquidity pressure in the banking system, allowing avoiding the development of the liquidity problems in individual banks into a systemic problem, as was the case during the latest bank liquidity crises. We think that Privatbank may become one of the first beneficiaries of the new facility, considering the current pressure on the bank.