The National Bank of Ukraine (NBU) plans to cut a third of its staff, raise capital requirements, and create a mega-regulator.
The NBU has developed a concept for reforming Ukraine's banking system by 2020, which among other things includes reducing the staff of the central bank, raising capital requirements for banks, limiting opportunities for early withdrawal of deposits, as well as forming a mega-regulator that will oversee the entire financial market.
'The transfer of credit unions, credit bureaus, and pawnshops under the NBU's supervision should be completed by the end of 2014, insurance companies - by mid-2015, and the regulation of the securities market - by mid-2016,' the concept's revision dated May 26 states, the text of which is held by the Interfax-Ukraine agency.
The NBU also plans to reduce its network in 2014-2015 to 5-7 regional offices, as well as cut its staff by a third.
'By the beginning of 2017, the number of NBU employees will decrease by 30% compared to early 2014 (despite the transfer of supervisory functions over other financial intermediaries in the market),' the document notes.
The NBU also plans to initiate an increase in the minimum regulatory capital requirement to 500 million UAH by 2018 and to 750 million UAH by 2020. Additionally, it will be proposed to increase the minimum charter capital requirement for new banks to 750 million UAH from the current 120 million UAH starting in 2015.
According to the estimates of the central bank, such measures will reduce the number of banks and increase asset concentration by 2020.
'The NBU plans to designate a separate group of systemically important banks, for which stricter capital and liquidity requirements will be established, but which will be able to expect more systematic and prompt stabilization assistance from the NBU during crises,' the document explains.
In this regard, mergers and acquisitions of banks are considered the most prioritized mechanism for capitalization.
'The NBU will develop legislative initiatives to simplify and stimulate the consolidation of banking capital,' the document states.
The NBU plans to facilitate the consolidation of small healthy banks to create more powerful systemic, regional, and specialized banks.
Additionally, it is planned to conduct stress testing of banks every two years.
'The task for the NBU and the government is to minimize costs for taxpayers during the capitalization of banks that have insufficient capital. For the recapitalization of systemic banks, the further operation of which is deemed appropriate, the possibility of creating a special fund together with international financial institutions should be considered,' the document notes.
According to the concept, it is expected that the banking system will develop at a faster pace compared to GDP growth: priority areas for lending development will be investment loans, lending to small and medium businesses, and mortgage lending.
The NBU intends to work on reducing the cost of bank loans to a level comparable to that of other countries in the region.
'It is expected that real interest rates will be maintained at a positive level for deposits (at 3-4%) and for loans (at 7-9%). The NBU will also take measures to reduce fluctuations in interest rates in the national currency and to control bank spreads,' the concept notes.
To address the issue of bad assets, the concept provides for the consideration by the NBU, the Deposit Guarantee Fund, and the Ministry of Finance of creating a systemic 'bad asset bank' that would accumulate problematic mortgage loans in foreign currency on the balance sheet of a single national institution (asset management company).
'Sources of financing for the bad asset bank can include both the state and private investors or international financial institutions,' the document emphasizes.
As a result, according to the concept, the volume of problematic debts on the banks' balance sheets will decrease to no more than 5-8% in the medium term.
The NBU also advocates forgiving the procedure for alienating collateral property in favor of creditors, as well as establishing clear liability for borrowers for providing false information when obtaining a loan.
To form a long-term resource base for lending, the concept proposes to introduce a legislative ban on early termination of deposit contracts. At the same time, as an exception, certain norms may create 'savings deposits', for which early access to funds will be possible.
Additionally, the NBU plans to increase the amount and share of deposits in UAH to 80% of all retail deposits.
'The level of guaranteed long-term deposits in UAH should be increased through the differentiation of guarantees for other deposits,' the document suggests.
The concept also provides for decreasing the disclosure threshold for information on owners who hold directly or indirectly shares in banks from 10% of charter capital to 2% as of today.
The NBU also plans to establish more restrictions on the size of transactions with related parties: the N7 standard is planned to be reduced to 15% by 2020 from the current 25%.
Furthermore, the NBU advocates for the consolidation of credit bureaus on a private basis, as well as for the consolidation of banking associations.
The protection of clients' interests in banks, according to the document, will become one of the tasks of the financial ombudsman: this institution is planned to be created based on the consolidated banking association.
Overall, the NBU aims to increase the share of foreign capital in the banking system to 50% and reduce the role of the state in the banking sector to below 10% by 2020.