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Ukrainian central bank names key risks for financial sectors

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Ukrainian central bank names key risks for financial sectors

The suspension of cooperation with the International Monetary Fund, sluggish economic reforms, the low efficiency and high market share of state-owned banks, and the weak legal system are the key systemic risk to Ukraine's financial stability, the National Bank of Ukraine said in its latest Financial Stability Report, adding that systemic risks remain moderate, but they could increase in 2018.

The suspension of cooperation with the IMF was singled out by the regulator as the key macroeconomic risk to financial stability over the coming years. The successful refinancing of over $20 billion of sovereign and state-guaranteed debt maturing between 2018 and 2020 is unlikely without the support of international institutions, and Ukraine should launch negotiations on a new IMF program before the existing one expires in early 2019, the regulator noted.

The central bank also pointed to the high market share of state-owned banks and high ratios of nonperforming loans in lenders' portfolios as the continued most important internal risks for the banking sector. The regulator called for the swift finalization of a strategy to reform and sell state banks and for a more proactive approach by lenders to resolve NPLs through the use of restructuring and writeoff mechanisms.

Nonperforming loans constitute 56% of the Ukrainian banking system's debt portfolio, Reuters said Dec. 18, citing Vitaliy Vavryshchuk, director of the central bank's financial stability department. The official reportedly noted that 62% of the nonperforming loans belong to state banks, with 35% held by PAO KB Privatbank, nationalized in December 2016. Vavryshchuk expects a gradual fall in the proportion of bad loans due to the improving economic situation in Ukraine. However, sharp changes are not expected unless banks start using write-off instruments, Reuters noted.

The Ukrainian central bank also said in its Dec. 18 statement that it plans to introduce the liquidity coverage ratio in 2018 and present new requirements regarding the structure of regulatory capital and eligibility criteria for its components. The regulatory capital requirements, however, will only be implemented after the completion of a detailed quantitative analysis to study their effects on the banking sector. The Ukrainian regulator also said it would start conducting annual stress tests for lenders with combined assets of least 90% of the banking sector's total and that it will enhance disclosure standards for banks' financial and prudential reports.