Andriy Pyshnyy: “We at the NBU have declared a war on uncertainty”

Despite the undoubted successes of the National Bank of Ukraine (the NBU), including the refusal from monetary financing, the reduction of inflation and the increase in the cost of domestic government bonds, there are scandals in the banking sector. In the first part of the interview, we discussed the global and the strategic; now in the second part we addressed everyday issues: whether bank supervision is effective, whether there will be more state-owned banks, whether it is fair to pay extra fees for exchanging worn dollars and what to expect from bank stress tests.

Still, we started with the main thing: is it possible to trust the NBU as one of the main forecasters of the state in conditions when even tomorrow is unclear? 

“Mr Pyshnyy, how difficult has forecasting become in times of total uncertainty? On the one hand, the renewed strategy of the NBU was expected, because the circumstances have changed a lot. On the other hand, it is difficult to understand how the NBU predicts something and even more so plans now.”

“We at the NBU have declared a war on uncertainty. It’s a word I’ve heard maybe the most frequently in the last eight months of my office: total uncertainty, unprecedented uncertainty, sheer uncertainty, sort of a contest for the best adjective for the word ‘uncertainty.’

It seemed to me that even the NBU was a little surprised when I suggested starting strategic planning, because the NBU already had a strategy until 2025. However, the context has changed, priorities have changed, and the market has changed. Because of this, I suggested that the team rethink these things. One of the goals is to reduce the uncertainty zone.

The strategy has several parameters. It is built on two focuses. The focus of resistance and the focus of peace, recovery. The Memorandum with the International Monetary Fund was built according to the same logic. The basis of the strategy is our European integration. Everything we can do to fuel our capacity and implement reforms, even in the face of war, is already laid in the stage of resistance. Of course, there are things that we will do after the victory.

What is important is that the strategy is indefinite. We will focus on resistance as much as necessary. When the time comes, let’s move on to the focus, which involves recovery. But the strategy provides for its review every six months. Then once a year it can be reviewed from the point of view of priorities and tasks. Strategy is nothing, strategizing is everything. This is what makes it possible to provide you with constant critical analysis. This is an important moment for the team to feel that it has reduced its own uncertainty zone.”

“Is this the main function of this document?”

“This strategy serves another function. It is the starting point for the preparation of the financial sector strategy. This document should appear by the end of June this year, it will clearly define how the entire financial sector will develop from the point of view of strategic directions. We are actively working on it.

After that, the NBU also considers it expedient to start the process of analyzing the development strategy of the state banking sector. State-owned banks could begin the process of their own strategic planning, but for this they must have the initial parameters of the strategy for the development of the public banking sector.

Why can I talk about this even during the war? Because we see that this is what stakeholders expect from us, and to be honest, state-owned banks have become more ready and capable, because the composition of the supervisory board has been changed in every state-owned bank. Perhaps this is not the perspective of the coming months, but it is the subject of our conversation and discussion, including with the Ministry of Finance.

In addition, the new strategy of the NBU has clear goals and specific parameters by which everyone can evaluate their implementation. And the strategy provides for an alternative scenario. If the macro conditions will be different from what we laid down, accordingly, the alternative scenario of development assumes other parameters of strategic priorities.

During my participation in the summer meeting of central banks, when I told my colleagues that we had approved a new strategy, many were surprised. But strategic planning during wartime is a very useful exercise in stripping away illusions, removing all the unnecessary.”

“From the general and strategic, I would like to return a little to substantive issues. Banks are currently undergoing stress tests. What to expect?”

“We have started a resilience assessment, an exercise that will be carried out directly by the NBU. The first stage — the asset quality review — began in May. It covers 90% of all assets of the system, because the 20 largest banks are evaluated. After the review of assets and collateral, the second stage provides for the extrapolation of the results to the rest of the loan portfolio (which was not included in the assessment pool. — Yu.S.). And the third stage is an assessment of the stability of business models according to the basic scenario and determination of the amount of recapitalization and other further steps that banks will need to take.

The banking system assumed a significant part of the risks that were generated by the war. The total amount of reserves formed by banks is about 107 billion hryvnias. We will perform the assessment to understand whether this is sufficient and whether the asset quality is adequately assessed.

In 2024, as soon as security risks permit, an assessment with the participation of independent experts should take place in accordance with the agreements with the IMF. Accordingly, our resilience assessment must be completed prior to this. We expect that by April 2024 we will come to an understanding of the plan of measures with the banks, which the banks will have to implement by 2026, that is, at a fairly comfortable pace.

Currently, I see that we managed to achieve quite positive results: regulatory capital adequacy at the level of more than 22%, core capital adequacy at the level of 14%. This is twice as high even as the pre-war normative values.”

“At this point, critics of the National Bank would say: of course, you keep the key policy rate at 25%, banks don't lend to anyone, business is risk-free, that’s why they are so stable and successful. At the price of economic development.”

“We accept criticism, but at the same time clearly balance our priorities. Financial stability as one of the key mandates of the NBU is ensured. The banking system is the lifeblood of the country, and it functions smoothly under all conditions, including a blackout. In addition, the banking system is both a source of resources for business support and recovery, and a bridge that will connect the private capital of foreign investors with the needs of Ukrainian enterprises. This level of confidence in financial stability will be a strong argument for attracting private investment.

Of course, demand for loans was depressed. Of course, the willingness of banks to take risks was restrained.

However, according to the results of the survey that took place in May, we see that the expectations of the bankers themselves are becoming more optimistic. Today, credit appetites are growing, credit regulations are being revised, and borrowers are more prepared.

Do you know how they explain these positive changes? Macro-financial stability. It is at the core, one way or another. Falling inflation and improving expectations are components of rates and the risk premium.

The financial system is sufficiently capitalized. After the assessment, we will finally understand what measures still need to be taken for it to be sustainable in the long term and take on the challenges that the flow of resources that will finance the recovery will bring to Ukraine. We are currently gradually reintroducing regulatory requirements where possible.”

“What kind of challenges are you talking about?”

“It will also be a difficult task to absorb large sums of money efficiently and transparently. A fresh Italian example, when the EU provided them with more than 200 billion euros to fight the consequences of COVID. And this amount was very difficult to absorb, and it was distributed. In fact, it became a challenge for both the country’s financial system and the public finance system.

Therefore, we at the NBU see both this part of the problems and at the same time opportunities. We are preparing for them.”

“The story of money laundering through banks, a rather high-profile scandal for the financial sector, is also a challenge. How is that even possible with the existing supervision, with the corporate governance, with all these best practices that we already have in place?”

“It is a difficult story, which affects the reputation of the banking sector, which has undergone a very difficult process of reform.

I’ll start again with good news. In May, the taxes paid by the gambling business sector reached more than 800 million hryvnias, while in May 2022, if I am not mistaken, they did not exceed 30 million hryvnias. In the first five months of 2023, the budget received four times more than for the entire last year.

That is, for the NBU, this issue was simultaneously in several dimensions. The first is the fight against money laundering and legalization of income. The second is to improve the efficiency of financial monitoring and occasionally create additional sources of filling the state budget from the sector that generates shadow revenues.

We discovered serious problems in the internal control and risk management system in nine banks, which were not covered by a sufficient level of competence and high-quality work of the supervisory boards, compliance, and finance. Among the participants of these schemes were state-owned banks, unfortunately, in particular – Ukrgazbank.

Certain personnel changes took place, a new composition of the supervisory board was formed. Fines were imposed. We are very keen to see banks regain the level of confidence they deserve given the high expectations for corporate governance reform.”

“You know, when you talk to bankers about this story, you hear indignation: yes, the bank was fined, yes, the members of the supervisory board were replaced. Is this a punishment? Did these former members of the supervisory board not know what was happening? However, they have not been punished and will not be punished in the future. The corporate governance, for which we have fought for so long, looks like a desecration because people are not held accountable even in such blatantly criminal stories.”

“Indeed, there is a need to improve corporate governance. Because of this, the NBU did not even approve some of the members who were selected for the new composition of the supervisory board. The qualification commission started to work, it started to ask questions, assess the professional level, test as it should, pay attention to such things as conflict of interests. As a matter of fact, the qualification commission of the NBU began to perform the functions that it must perform according to the law.

Regarding the responsibility of those officials who committed such things, both professional and other responsibility, we are in cooperation with many law enforcement agencies. Those facts of violation of the legislation that were discovered and entail the corresponding responsibility are, of course, and will be the subject of consideration by the competent structures. Simply put, we're not done yet.

The NBU, in turn, takes the measures it can. This is an increase in the quality of corporate governance, monitoring, assessment of collective suitability, quality of internal control, application of corrective measures, including fines, appropriate communication with law enforcement agencies, and preparation of relevant proposals for improvement of NBU regulations.”

“Will banking supervision become stricter?”

“Supervision will become more effective. The process of its reforming has begun. The NBU launches so-called supervisory panels/colleges, which will combine the expertise of several departments.

The possibility of the existence of this complex fraudulent scheme relates to the fact that both banks and non-bank financial institutions participated in it. It was built on a rather complex technological platform: somewhere there were backdoors embedded in the processing system, somewhere there were interrupted transfers, miscoding. And all this was not sufficiently consolidated. If you look at each of the elements separately, you could not notice the scale of these things.

We realized that we needed an integrated supervision that would combine the expertise of many departments. Supervisory teams should not only be formed from representatives of the Department of Banking Supervision, but also use the expertise of the payment infrastructure, financial monitoring, legal department, and security. Risk-based approach as a basis, deep analytics as a tool.

The approach assumes that supervision should take into account the specifics of the business model, be grouped according to these specifics, and use the necessary expertise. If the bank is exclusively transactional, then it is necessary to strengthen this component and aspects related to it.

Therefore, the system of prudential supervision is already being reformed. After all, the violation is significant - we are talking about billions. In conditions of war, in conditions of budget deficit.

For us, this includes ensuring our macro-financial stability, because the budget's receipt of appropriate funds from the legalization of this market reduces the risks of the need for its monetization.”

“I’m sorry, after the story with Avangard and ICU, I have to ask, where are these billions now? Because maybe someone is already buying certificates of deposit for them?”

“If you mean the funds from the liquidation of MT Bank (Sberbank), then, according to the information that I know, the funds have already reached the state budget. But those funds that were distributed belong to those to whom they were distributed. We are currently expecting lawsuits and proceedings on this matter. If the case is open, you will be able to follow the further course of events and get more answers.

Since this story is resonant and may have significant public interest, we will discuss the grounds and expediency of opening certain information at the board level.”

“We will be very grateful for the disclosing of any information. For example, in relation to the nationalization of Alfa Bank, on the threshold of which we are standing.”

“I ask for your understanding – this question needs careful wording. The law, which was passed by the parliament with a constitutional majority and signed by the president a few days ago, applies to all systemically important banks whose shareholders are under sanctions. It is aimed at maintaining financial stability and gives the NBU an important toolkit to apply corrective measures in case there is a threat to the rights of depositors and creditors of a systemically important bank whose shareholders are under sanctions.

Of course, we see those messages that come from the shareholder about his desire to sell the bank. But the owners of a significant share are currently under sanctions, both international and national. These blocking sanctions, accordingly, do not provide for the ability to dispose of assets. Therefore, the NBU does not consider it possible to review issues related to alienation while the decisions of the National Security and Defence Council are in force. This is contrary to the sanctions legislation.”

“Again, sanctions make it impossible, for example, to recapitalize a systemically important bank in case of need. Which is definitely a risk.”

“Yes, it is a risk. The NBU will take all necessary response measures in a timely manner and in full to ensure the protection of the rights of depositors and creditors, complying with the requirements of the law. This is my answer.”

“Despite the fact that the NBU has taken measures, some actors in the currency exchange market continue to charge an additional fee for accepting worn banknotes. Are there ways to speed up the punishment for such unmarketable behavior?”

“I have several messages about this at once.

First, it is immoral and unacceptable, especially in wartime, to force citizens to exchange 100 “white” dollars for 90 “blue” dollars or to demand an additional commission. All US dollars issued since 1914 are valid. “White” or “blue” – they are still “green.” Their value is determined by the denomination and the exchange rate. That’s it. There are no additional fees for exchanging real currency depending on its denomination, design, or year of issue.

Second, citizens should not lose their funds due to fictitious “damage/wear and tear.” That is why, with the latest changes, we have completely removed the human factor, prohibiting banks and non-bank financial institutions from denying customers currency exchange if the counter or detector at the cash register has confirmed the authenticity of the banknotes. This means that the cashier cannot “by eye” assess the authenticity of banknotes or their condition and refuse to carry out a currency exchange transaction.

Third, any ‘creative’ interpretation of the NBU’s position by market participants or ignoring our demands will lead to an inevitable and adequate reaction from the regulator. I really want everyone to hear me: by inventing their own requirements for banknotes, ‘drawing’ commissions for non-existent services, not monitoring the operation of the network, the participants of the currency exchange market are exposed not only to the risk of inevitable fines, but also to the termination of their license.”

“While it seems that not all market participants hear and understand you.”

“This issue is under special control at the NBU. We met with banks and non-bank institutions several times, listened to their positions, presented them with the NBU’s decision, and made sure that we understood the issues in the same way.

We reported on how we see a comprehensive settlement of the problem, what we expect from the market, and warned that we are closely monitoring the situation.

Every day we promptly monitor the appeals and complaints of citizens regarding problems with the exchange of cash currency. I personally visited more than one exchange point and was able to assess the problem from my own experience. I communicate this information to the level of managers of systemically important banks every day; and my deputy, Yuriy Heletiy, does so to the non-banking market.

After the adoption of our decisions, the number of such appeals is significantly reduced, especially complaints against banks. There is a noticeable difference between Kyiv and the regions. At the same time, the NBU already considers the received complaints for planning and conducting inspections. If the facts of systemic violations are confirmed, do not be offended.”

“Unfortunately, this can only work with legal actors on the market, but we know there are illegal ones too.”

“This is what the legal field is all about. If we are talking about illegal currency exchange, work without an NBU license, law enforcement agencies should have their say here. I have signed a corresponding letter to the heads of law enforcement agencies.

Banks and non-bank financial institutions should realize an important point — the sooner they stop unscrupulous practices, the sooner they will be able to restore people’s trust.

Herewith they will be able to restore the normal functioning of this market. The NBU will contribute to this.

People should be confident that they can safely exchange foreign currency notes, regardless of denomination or year, as long as they match the patterns and descriptions of foreign central banks, are authenticated by detectors, and do not show signs of significant wear or damage. This information bubble around currency exchange can be destroyed in the same way it was created: by common communication and a unanimous rejection of artificially created and illegal restrictions on the functioning of the market.

If citizens see that they can easily receive and exchange back all genuine notes, they will not worry, and the confusion will gradually fade.”

“Another important question to which attention was drawn: at the FATF plenary meeting in June, it was expected that Russia would be included in the so-called blacklist, as Ukraine sought. This did not happen. What are the consequences of this decision and what is next?”

“The team of the Ukrainian authorities has done a great job of collecting evidence confirming Russia’s involvement in the financing of terrorism. All of them, together with legal arguments, were set out in an extremely professionally formed statement of Ukraine to the FATF. As the governor of the National Bank of Ukraine, I personally appealed to the heads of central banks of countries from the pro-Ukrainian coalition, which are influential FATF members: the United Kingdom, France, Italy, the Netherlands, Belgium, Sweden, and India, to support Ukraine’s submission.

Our arguments related not only to how the actions of the Russian Federation directly violate FATF standards. In our field, we see processes that, if not stopped, will have colossal negative consequences for the global financial system.

Today, the financial system is overflowing with illegal money flows of Russian origin more than ever because the Russian Federation needs resources for its criminal activities – financing terrorism, purchasing weapons and their components to bypass all imposed sanctions restrictions and export control measures.

A strategic alliance between Russia and Iran is forming in front of us. Such a union is toxic. It poisons the global financial system because it opens the way for illicit financial flows from a FATF blacklisted country.

Russia’s exclusion from the FATF and its inclusion in the so-called blacklist would not only protect the global financial system from the risks posed by Russia, but also significantly strengthen the coalition’s sanctions regime. The move would complicate Russia’s attempts to procure high-tech weapons components through middlemen for Russian companies by requiring financial institutions to apply heightened monitoring protocols to transactions that may have ties to Russia.

However, this, unfortunately, did not happen. The decision of the FATF is taken by consensus, which did not take place at this meeting as a decisive and necessary step to protect the global financial system from dirty Russian money was not taken. This undermines confidence in the system and creates a dangerous precedent that threatens international cooperation to combat money laundering, terrorist financing and the proliferation of weapons of mass destruction.”

“Is this battle finally lost or are there still chances to win something?”

“In its final statement, the FATF emphasized three important things: the war of the Russian Federation against Ukraine continues to contradict the principles of the FATF regarding the protection of the international financial system; the suspension of the membership of the Russian Federation in the FATF continues to apply; The Russian Federation continues to create risks for the global financial system, accordingly, the need to respond by all jurisdictions remains.

That is, in fact, all the prerequisites for adding the Russian Federation to the so-called blacklist remain, and therefore, our efforts are not in vain, we just need not to stop, but to increase the pressure and collect even more evidence and even more arguments. After all, we understand: the Russian Federation will act more and more defiantly. So, there is every chance that awareness and real manifestations of the threat it poses to the global financial system will eventually be stronger than their blackmail and lobbying.

For its part, the NBU will also continue to search for ways to increase financial pressure on the aggressor. The position of the NBU regarding financial sanctions is unchanged and consists in the fact that the existing practice of applying personal sanctions only to certain institutions of the Russian Federation that provide financial services not only does not contribute to their effectiveness, but also creates conditions for the spread of mechanisms to avoid sanctions restrictions.

The issue of the application of sectoral sanctions by the USA and other influential partners to all financial institutions of the Russian Federation, including the central bank of the Russian Federation, and their subsidiaries in Russia and abroad, to minimize the opportunities and risks of avoiding the applied personal sanctions with the involvement of other non-sanctioned persons, systematically violated by the leadership of the NBU at many meetings of all levels.

We are confident that the expanded application of sectoral sanctions will be a powerful signal for foreign countries to implement their sanctions policy more actively.”

Read this interview in russian and Ukrainian.