The previous month was notable for a number of legislative initiatives, among which is approving a new prudential standard for Ukrainian banks — Liquidity Coverage Ratio (LCR).

How can introduction of this standard affect the investment attractiveness of the banking system describes Sergii Papernyk, Head of Banking & Finance and FinTech at EVRIS, for The Ukrainian Journal of Business Law.

Continuing to apply the Comprehensive Program of Ukrainian Financial Sector Development Until 2020, on 15 February 2018 the National Bank of Ukraine approved the new prudential requirement for Ukrainian banks i.e. Liquidity Coverage Ratio (LCR).

Basically, the LCR refers to highly liquid assets held by financial institutions to meet short-term obligations. The ratio is a generic stress test that aims to anticipate market-wide shocks. The liquidity coverage ratio is designed to ensure financial institutions (i.e. banks) have the necessary assets on hand to ride out short-term liquidity disruptions. The LCR is an important part of the Basel Accords, namely Basel III, which Ukraine is implementing step by step.

Compliance with the ratio confirms that the bank has sufficient liquidity to discharge liabilities during a 30-day crisis period. According to EU standards, the LCR value for banks is set at 100%.
The period required to reach the said value by banks will be prescribed by the NBU according to results of trial calculation.

The LCR will be calculated from 1 June 2018 on a trial basis, then compliance with the LCR will be obligatory for banks. For some period, the quick liquidity ratio (N4), the current liquidity ratio (N5) and the short-term liquidity ratio (N6) should be applied along with the LCR, but then they will be replaced.

Of course, the new approach of banking regulation is the great step towards the EU and world standards. Along with the new risk-based assessment policy, the LCR will allow the Ukrainian banks to become more transparent and more attractive for foreign investors and international financial institutions.

Certainly, many NBU regulations and even laws of Ukraine should be brought into line with the new ratio requirements. For instance, legislative acts can prescribe some incentives for current liquidity ratios for commercial banks in the certain situations. Therefore, there could be a question of how banks may use current incentives for liquidity ratios (N4, N5, N6) and, at the same time, not to infringe LCR requirements.