## Preface

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---

### Mission background and purpose
- At the request of the National Bank of Ukraine (NBU), a Monetary and Capital Markets (MCM) Department hybrid mission was conducted from November 4–8, 2024 (virtual) and December 2–6, 2024 (in-person, in Vienna).
- Objective: assist the authorities in aligning the criteria for counterparty eligibility for monetary policy operations and their coordination with lender-of-last-resort operations (ELA) with international best practices.
- The mission met with senior NBU officials including: Mr. Yuriy Heleteiy (Deputy Governor), Mr. Ihor Pronin (Director, Credit Analysis and Liquidity Support Department), Mrs. Pervin Dadashova (Director, Financial Stability Department), Mr. Serhii Demydenko (Director, Risk Management Department), Mr. Oleksandr Arseniuk (Acting Director, Open Market Operations Department), Mr. Andrii Kotiuzhynskyi (Director, Integrated Banking Supervision Department), Mr. Oleksandr Pushkar (Deputy Director, Credit Analysis and Liquidity Support Department), and Mr. Mykola Selekhman (Deputy Director, Open Market Operations Department), as well as other senior staff.
- The report presents the mission’s assessment and main conclusions.

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### Executive summary — scope and high-level findings
- Mission reviewed:
  - NBU’s counterparty eligibility criteria for monetary policy lending operations.
  - NBU’s Emergency Liquidity Assistance (ELA) framework.
- Safeguards Assessment context:
  - 2019 and 2023 Safeguards Assessments identified the need to align counterparty eligibility with leading practices, notably by including compliance and monitoring of counterparties’ financial soundness.
- Main assessment points and recommendations (high level):
  - Amend counterparty eligibility criteria to introduce financial soundness requirements.
  - Implement automatic access limitation measures for non-compliance with solvency requirements; these measures should be as automatic as possible within a rules-based framework.
  - Institutionalize dialogue between banking supervision and market operations to enable proactive limitation/suspension of counterparties.
  - ELA Regulation is comprehensive and broadly aligned with best practices but gaps remain:
    - Expand collateral eligible for ELA to include assets eligible for monetary policy operations.
    - Work with the Ministry of Finance (MoF) toward a Memorandum of Understanding (MoU) on information exchanges and explore government guarantees in particularly risky ELA cases.
    - Set ELA interest rate as a fixed spread over the overnight loans rate.
    - Clearly set ELA loan maturity at a maximum of two weeks, renewable.
  - Operational readiness improvements:
    - Streamline and test mobilization processes for credit claims used as ELA collateral and explore prepositioning of credit claims.
    - Improve ELA governance, internal organization and communication.
    - Conduct ELA simulations using real data to test procedures and identify improvements.

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### Key recommendations (highlights from Table 1)
- Counterparty eligibility for Monetary Policy Operations:
  - Amend eligibility criteria to include financial soundness criteria, rooted in solvency. Priority: High. Timeframe: Near-term. ¶34, ¶35
  - Introduce a new counterparty measure of limitation. Priority: High. Timeframe: Near-term. ¶36
  - Ensure measures regarding counterparties access to monetary policy operations are as automatic as possible, within a framework of rules. Priority: High. Timeframe: Near-term. ¶37
  - Set-up institutionalized dialogue between banking supervision and markets operations for proactive limitation/suspension. Priority: High. Timeframe: Near-term. ¶38
  - Prepare an implementation strategy and roadmap. Priority: High. Timeframe: Medium-term. ¶39
- Emergency Liquidity Assistance and its Collateral Framework:
  - Set the interest rate on ELA as a fixed spread over the overnight loans rate. Priority: High. Timeframe: Near-term. ¶59
  - Set the maturity of any ELA loan at up to two weeks. Priority: High. Timeframe: Near-term. ¶61
  - Add collateral accepted for monetary policy operations to the eligible collateral for ELA. Priority: High. Timeframe: Near-term. ¶66
  - Streamline mobilization of credit claims as ELA collateral and test mobilization with banks in real conditions. Priority: High. Timeframe: Medium-term. ¶68, ¶69, ¶71, ¶72, ¶73
  - Explore prepositioning of credit claims for ELA collateral. Priority: High. Timeframe: Medium-term. ¶68, ¶69
  - Work with the MoF towards an MoU on information exchanges and explore government guarantees in certain ELA situations. Priority: High. Timeframe: Near-term. ¶75
  - Create an ELA Team composed of 2-3 staff from each involved Department to ensure speed and restricted circulation of information. Priority: High. Timeframe: Near-term. ¶91
  - Regularly conduct ELA simulations. Priority: High. Timeframe: Medium-term. ¶93
  - Prepare a communication strategy on ELA. Priority: High. Timeframe: Medium-term. ¶96
- Timeframe definitions:
  - Near term: < 12 months.
  - Medium term: 12 to 24 months.

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### Purpose and scope (Introduction)
- NBU intends to enhance readiness to respond to banking system crises while strengthening mechanisms to protect its balance sheet.
- Two focal aspects:
  - Review counterparty eligibility criteria for monetary policy operations (introducing financial soundness requirements).
  - Strengthen and operationalize the NBU’s ELA framework.
- Safeguards context:
  - 2019 Safeguards Assessment highlighted need to review counterparty eligibility to include compliance and monitoring of financial soundness.
  - 2023 Safeguards Assessment reiterated that counterparty eligibility requirements do not include compliance with regulatory requirements such as capital adequacy.

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### Financial system and monetary policy operational framework — key facts and statistics
- Banking system structure and funding:
  - Number of banks: 62.
  - Total banking assets: 3.2 TN UAH.
  - Ownership composition:
    - Government-owned banks: 7, accounting for just over half of total bank assets.
    - Foreign-owned banks: 14, accounting for about 30 percent of assets.
    - Privately owned banks: 42.
  - Funding: Banks are 93 percent funded by deposits.
  - All foreign banks are owned by euro area banks.2
- Reserve requirements:
  - All counterparties must fulfill a reserve requirement, up to 35 percent of FX-denominated deposits.
  - NBU reserve requirements for domestic currency:
    - 25 percent for consumer deposits (except deposits with minimum initial maturity of 93 and more calendar days, which require 0 percent reserve ratio).
    - 15 percent for corporate deposits.
  - For FX-denominated liabilities:
    - Requirements increase to 25 percent and 35 percent respectively (15 percent for consumer deposits with minimum initial maturity of 93 and more calendar days).
  - 60 percent of total reserve requirements can be fulfilled with Ukrainian government bonds at par value.
  - NBU uses reserve requirements to steer liquidity conditions; only banks have access to Monetary Policy Operations (MPOs).3
  - The NBU increased reserve requirements by 5 percentage points as recently as October 2024.
- Monetary policy operational regime and instruments:
  - Post-invasion liquidity regime: excess liquidity; decision in October 2023 to operate in a floor system/regime.
  - Tenders are operated on a demand-basis, with no restriction on the amount of liquidity that can be provided if sufficient collateral is available.
  - Key policy rate (KPR): NBU steers interest rates through a floor-system, using its deposit rate as the de jure KPR.
  - Since the full-scale military invasion in 2022, the key policy rate changed to the overnight CD-rate, which currently stands at 13 percent.
  - Main MPOs and instruments include long- and short-term refinancing operations, liquidity-absorbing two-week certificate of deposit (CD), and a collateral framework mostly consisting of government debt securities.
  - Excess liquidity projection: excess liquidity is forecast to decrease and normalize near mid-2026.
- Interbank market and implications:
  - Interbank money markets are currently not active; secured activity is most dominant.
  - Excess liquidity depresses the interbank credit market; number and volume of transactions are currently very small.
  - Absence of market-based options elevates the NBU’s role in liquidity provision during shocks, increasing the importance of financial risk management and protections against counterparty-specific risks.
- Role of ELA:
  - ELA is the ultimate line of defense against liquidity shocks and is distinct from MPOs: ELA goal is financial stability; MPO goal is price stability.
  - ELA entails stronger conditionalities, shorter tenors, and closer scrutiny when counterparty solvency is doubtful.

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### Counterparty eligibility for MPOs — findings and recommendations
- Eligibility conditions and legal basis:
  - Conditions for MPO participation are operational, no-arbitrage and prudential in nature, and include fulfilling a reserve requirement.
  - Legal and regulatory roots: NBU Law and Regulation 615; amended by martial law measures (Resolution 22 excludes foreign-owned entities from Russia and Belarus; Resolution 23 gave banks a temporary waiver for solvency and liquidity requirements insofar as breaches stem from the invasion by Russia).
  - Current practice: no direct proactive solvency/financial soundness requirements in NBU eligibility criteria; NBU excludes counterparties only when declared insolvent. A banking license is required.
- Problem bank designation and operational effects:
  - “Problem bank” designation reasons: 45 percent solvency or liquidity concerns; 55 percent other concerns.
  - Survival rate: 75 percent of Problem banks were liquidated after receiving the designation (period 2015-2024).
  - If designated Problem Bank by prudential function, MPO operational systems automatically disallow participation in longer term MPOs (access to shorter term MPOs is maintained).
  - Open Markets Department (OMOD) is not informed when a bank is declared Problem bank.
  - Risk: continuation of short-term liquidity provisioning to Problem Banks may expose the NBU to potential losses.
- Financial soundness principles and monitoring:
  - Principle: central bank should not provide credit to an insolvent counterparty.
  - Recommended approach:
    - Assess solvency in real-time and implement proactive (automatic) measures for liquidity-providing operations.
    - Complement solvency checks with supervisory and operational criteria and a collateral framework (dual recourse).
    - Treat counterparties equally and avoid requirements above legal/prudential minima.
  - Example minimum solvency benchmarks (Basel-III Pillar 1 minima suggested):
    - at least 4.5 percent CET1; six percent Tier 1; eight percent Total Capital; three percent Leverage-ratios.
  - Liquidity ratios: monitor LCR; NSFR <100 percent for Basel-III and use breaches for enhanced monitoring, but not automatic exclusion.
  - Monitoring sources: prudential reporting (backward-looking) and market intelligence; establish information exchange between supervision and markets based ideally on ‘live’ data.
- Discretionary and automatic measures framework:
  - Principle: measures limiting access to MPOs should be rule-based and automatic where possible; entrance/on-boarding criteria equal for all counterparties.
  - Three possible measures:
    - Limitation: exposure cannot be increased; outstanding operations can be rolled over but not increased; temporary with set timeline.
    - Suspension: prohibited from further MPO participation and required to repay outstanding amounts in full; access to payment systems may remain.
    - Exclusion: immediate termination of MPO access; repayment in full; all legal contracts terminated.
  - Grace period and timing (Eurosystem example):
    - Automatic limitation should apply as soon as non-compliance is identified.
    - A grace period up to several weeks (up to eight weeks in the Eurosystem).
    - If breach found in automated reporting exercise, grace period is six weeks.
    - Supervisor should indicate quickly (within two weeks) whether non-compliance is expected to be temporary.
    - If non-compliance is not temporary, suspension should occur immediately; reinstatement upon supervisor confirmation that solvency restored.
- Recommended actions:
  - Amend counterparty framework to include broad financial soundness criteria, at least on solvency consistent with Pillar 1 minima.
  - Apply criteria ex-ante at onboarding and during the life of the counterparty; share revised framework transparently (e.g., website and/or updated Terms & conditions).
  - Introduce limitation as intermediate measure with a grace period to enable recapitalization.
  - Make measures rule-based and automatic where possible, applying at least to all liquidity-providing MPOs.
  - Institutionalize dialogue between IBSD and OMOD, complemented by automated prudential reporting:
    - IBSD to signal doubts on solvency prospects to OMOD to trigger measures.
    - Automatic measures applied by OMOD with immediate notification to the NBU Board; discretionary measures proposed by OMOD and decided by the NBU Board.
    - Explore whether Problem Bank status should be shared with OMOD and lead to automatic actions.

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### Emergency Liquidity Assistance (ELA) — practice, gaps, and recommendations
- Historical ELA experience:
  - NBU established an ELA framework in 2016; some prior LOLR loans resulted in significant losses.
  - Since 2016, seven banks requested ELA:
    - three requests were rejected because the banks had Russian shareholders (requests occurred after the Russian invasion of Ukraine in 2022).
    - two were rejected because it was assessed those banks did not have an impact on financial stability.
    - two did not follow through with the ELA request.
  - For the two cases that progressed, analysis took around three weeks, including circa two weeks for collateral due diligence and one week to make the final decision.
  - Outcome: of the seven banks that requested ELA, only one is still in operation.
- Objective response time:
  - Recommendation: NBU should aim at responding to an ELA request in a maximum of 24 to 48 hours.
- Legal basis:
  - NBU Law Article 6 (part 3) and Article 7 (part 1, paragraph 3) confer responsibility to promote financial stability and act as lender of last resort.
  - Article 42 part 1 paragraph 1 of the Law on the NBU provides that the NBU grants loans to banks to maintain liquidity at a rate not lower than the NBU's refinancing rate and in accordance with the procedure set by the NBU.
- ELA regulation assessment — major gaps:
  - Non-acceptance as collateral for ELA of assets eligible for monetary policy operations.
  - Conditions under which ELA can only be provided with a government guarantee should be specified.
- Forward-looking solvency and viability:
  - ELA can only be provided to solvent banks; solvency defined in a forward-looking manner (Article 6 of ELA Regulation).
  - If a bank temporarily does not comply with prudential capital requirements but has credible prospect of restoring appropriate capital ratios in not more than six months, it could be considered fundamentally solvent and could have access to ELA.
  - Operational recommendation: develop a template for a synthetic assessment of solvency including (i) latest capital adequacy ratios; (ii) summary of developments in those ratios; (iii) info on expected profitability, asset quality, NPLs, provisioning; (iv) assessment of ability to restore capital ratios; (v) forward-looking info on recapitalization prospects including willingness of current shareholders and interest of potential investors (including the State).
  - Ensure active participation of IBSD in forward-looking solvency assessments even when FSD oversees the analysis.
- Assessment of last-resort criteria and conditionality:
  - ELA should be possible only after exhaustion of all other alternative funding sources.
  - Measures to ensure ELA is last resort:
    - Interest rate should be high (at least 200 basis points above the rate of the marginal lending facility).
    - Strict conditionality attached to emergency liquidity.
    - Intrusive supervisory measures can be implemented.
  - ELA should not substitute for intragroup funding; preferably provided at parent bank’s level.
  - Where foreign supervisors are unwilling to share supervisory information, ELA to subsidiaries should be accompanied by measures preventing ELA loans being channeled to parent bank.
- ELA interest rate:
  - Current Regulation defines ELA interest rate as the NBU’s key policy rate plus two percentage points.
  - This implies the ELA interest rate currently stands at 15 percent, while the overnight loan facility stands at 16 percent.
  - Recommendation: Define the ELA interest rate as a fixed spread (for instance, of 200 bps) over the overnight lending facility rather than the key policy rate.
- ELA maturity and time limits:
  - Current regulation: ELA loan maturity of up to 90 days, extendable by up to 90 days, not exceeding a total duration of one year; amounts recalibrated based on a short-term (two-weeks) liquidity forecast.
  - Recommendation: Set the maturity of any ELA loan at up to two weeks to improve monitoring, emphasize conditionality, and align approvals with frequent updates.
- Collateral framework for ELA:
  - Current eligible collateral (excerpt): Guarantees of the Cabinet of Ministers of Ukraine; Guarantees of national governments; Corporate bonds (except target bonds), bonds of the State Mortgage Institution; Guarantees of International Financial Institutions; Guarantees of non-resident banks/financial institutions; Precious metals; Immovable property (except unfinished construction); Property rights under loan agreements with legal entities and individuals (with exceptions).
  - ELA framework currently does not accept as collateral assets accepted for monetary policy operations (e.g., Government Securities and foreign currency).
  - Haircuts: Published haircuts range from 10 percent (Guarantees of the Cabinet of Ministers of Ukraine) to 80 percent (some categories of credit claims).
  - For Government Securities accepted to MPOs haircuts range from five percent to 55 percent, depending on currency, maturity and coupon.
  - Recommendation: Add collateral accepted for monetary policy operations to eligible collateral for ELA, with an appropriate haircut.
  - Contextual statistic: On average, government bonds represent 26 percent of Ukrainian banks’ assets, corporate loans around 25 percent and retail loans around eight percent.

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### Collateral mobilization, prepositioning, and valuation of credit claims
- Operational challenge: Mobilization of illiquid collateral (credit claims) is time-consuming and critical to ELA activation.
- Recommendations on prepositioning and testing:
  - Regularly scan each bank’s collateral and ability to deal with outflows and consider prepositioning illiquid collateral for all banks or only systemic banks for a percentage of their assets or runnable liabilities.
  - Encourage banks to preposition collateral and conduct regular mobilization tests.
  - Prepositioning process: identify and verify eligibility and validate collateral without transferring legal title; once due diligence completed, collateral considered prepositioned and ready to be drawn against subject to approval.
  - Test credit claims mobilization in real conditions with (systemic) banks once verifications are completed.
- Acceptance criteria and valuation:
  - NBU acceptance criteria significantly reduce mobilizable credit claims; internal analysis found acceptance of less than 15 percent of total volume of credit claims on a bank’s balance sheet.
  - Alternative: accept all credit claims but apply very high haircuts (80 percent to 100 percent) to riskier claims.
  - Given current conditions—very high NPLs around 40 percent—the current NBU approach is considered prudent.
  - Offer: Further IMF technical assistance on streamlining credit claims mobilization and defining haircuts and valuation metrics.
- Haircuts and transparency:
  - Recommendation: Published ELA haircuts should be described as minimum haircuts to preserve discretion to apply more conservative haircuts when needed.

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### Government guarantees, MoU with the Ministry of Finance, and conditionality
- Principle: ELA should be extended where necessary to preserve financial stability only with a government guarantee in specified situations, as complement to collateral and recapitalization measures.
- Situations where government guarantee may be required:
  - i. Significant uncertainty on solvency: ELA only with government guarantee, plus collateral mobilization and credible recapitalization plan; ELA must not be provided if bank clearly insolvent with no credible plan.
  - ii. Insufficient collateral: ELA with government guarantee to fill collateral gap after maximal collateral mobilization and sound risk controls.
  - iii. Funding-in-resolution: ELA for funding-in-resolution only under government guarantee if central bank has concerns on the exit strategy; in a bank liquidation, ELA must not be provided.
- Recommendation: Work with MoF towards an MoU defining information exchanges, safeguards, and conditions requiring a government guarantee in certain ELA situations.
  - Implementation: operationalize strict safeguards (solvency/viability assessment, conservative haircuts, strict conditionality) to reassure MoF on mitigation of fiscal risks.
  - Clarify the process for putting a guarantee in place as part of ELA preparedness.

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### Conditionality, ELA Agreements, and monitoring
- Conditionality and corrective measures:
  - No ELA without conditions enshrined in an agreement and monitored through a funding plan.
  - Expand conditionality beyond restrictions to include corrective measures: sale of non-core assets; reinforced reporting obligations; suspension of dividends; limits on new loans; no bonuses; enhanced AML/CFT obligations; asset quality reviews and external audits at bank’s expense.
- ELA General Agreement and publication options:
  - Current status: ELA provision conditional on signing an ELA General Agreement; NBU has a template signed by two banks (they did not receive ELA).
  - Recommendation: Consider publishing the ELA General Agreement as a technical, non-legally-binding document or transmit it to banks for information; weigh pros and cons.
  - Recommendation: Tailor ELA Agreement using “building blocks” approach: core building blocks (general provisions, collateral management, reporting, penalties, termination) and complementary building blocks (lending/investment policies, asset sales, M&A provisions, salary/dividend restrictions, AML/CFT).
- Funding plan use, templates, and monitoring:
  - Recommendation: Use and possibly publish a funding plan template; NBU already developed a template used under Regulations 411, 783, and 457.
  - Funding plan operational guidance:
    - Update monthly or quarterly during ELA provision.
    - Allow iterative feedback between bank and banking supervisor.
  - Funding plan quality criteria (para. 83):
    - Must be: (i) credible; (ii) detailed and specific; (iii) reflect the bank’s best effort.
    - NBU must challenge assumptions; if plan insufficiently ambitious, supervisor should push for more ambitious remedial measures.

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### Decision-making, ELA Team composition, and operational preparedness
- Decision-making:
  - NBU Board decides on each individual ELA request; advised by the Credit Committee; decisions based on a proposal by the ELA Team coordinated by the Director of CALSD.
- Internal procedures and recommended ELA Team:
  - Current ELA procedure involves 11 departments; main participants include IBSD, FSD, CALSD, RMD, Legal Department.
  - CALSD leads and coordinates any ELA request.
  - Objective: set up an ELA assessment process that can be handled in 24 to 48 hours; current practice can take up to three or four weeks.
  - Recommendation: create an ELA Team, coordinated by CALSD, composed of 2/3 staff from each involved Department (maximum about 20 people; one manager and 2/3 staff per department) to ensure speed and confidentiality.
  - Team members should be freed from other ongoing work; processes executed in parallel rather than sequentially.
  - Proposed division of labor: reduce FSD involvement in detailed solvency analysis; strengthen Banking Supervision’s forward-looking view; FSD limited to assessing systemic relevance and overseeing forward-looking solvency assessment.
- Training, simulations, and communication:
  - Conduct annual ELA simulations using real banks’ situations combined with a simulated liquidity shock.
  - Regular cross-departmental training on ELA principles.
  - Workshops with banks to clarify ELA requirements, pre-mobilization of collateral, and signing constraining ELA Agreement prior to receiving ELA.
  - Develop a communication strategy comprising ex-ante, on-going, and ex-post transparency policies:
    - Ex-ante: manage expectations, highlight ELA is for liquidity needs of solvent and viable institutions.
    - On-going: generally strict confidentiality, but prepared to communicate in systemic crises coordinated with beneficiaries.
    - Ex-post: provide balance sheet data in Annual Report and assess whether more detailed disclosure is appropriate.
- Recommended operational actions to improve ELA preparedness (Box 5 summary):
  - Complement EWS with liquidity indicators (funding structure, funding costs, average maturity of interbank borrowings, shifts in secured/unsecured borrowing, insured vs. uninsured deposit breakdown, bidding behavior, repeated use of standing credit facility, reserve requirement fulfillment behavior, collateral buffers, maturity profile).
  - Prepare key technical documents: funding plan template, funding plan instructions, liquidity monitoring template, ELA Master Agreement, ELA collateral mobilization forms.
  - Prepare forward-looking solvency assessments (semi-annual/annual), viability assessments (annual), systemic assessments (annual).
  - Assess ELA collateral sufficiency (prepare exhaustive list of eligible credit claims per bank; define priority order for mobilization; calculate post-haircut values; define perimeter of loan mobilization per liquidity scenario).
  - Consider pre-emptive mobilization/pre-positioning of credit claims.
  - Conduct multi-disciplinary ELA team simulations and identify errors/gaps.

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### Funding plans and management during ELA
- Each new funding plan should be accompanied by written explanations on the bank’s strategy and presented by the bank’s senior management.
- Funding plan purpose and assessment:
  - Should reflect senior management’s commitment and be assessed by central bank and banking supervisor on:
    - (i) credibility;
    - (ii) deviations between realized and forecast balance sheet data;
    - (iii) revisions in successive funding plan versions; and
    - (iv) causes for deviations.
  - Funding plans provide a quantitative basis for remedial actions and iterative comparison between plans and realizations.
  - Depending on causes of negative deviations (e.g., delays in repaying ELA), central bank may adjust ELA decisions, strengthen conditionality, and/or increase overcollateralization.
- Operational guidance reiterated:
  - Funding plan should be updated monthly or quarterly during ELA.
  - NBU must challenge bank assumptions and require more ambitious remedial measures if plan relies excessively on ELA.

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### Preface ................................................................................................................

### Preface

### Mission background and purpose
- At the request of the National Bank of Ukraine (NBU), a Monetary and Capital Markets (MCM) Department hybrid mission was conducted from November 4–8, 2024 (virtual) and December 2–6, 2024 (in-person, in Vienna).
- Objective: assist the authorities in aligning the criteria for counterparty eligibility for monetary policy operations and their coordination with lender-of-last-resort operations (ELA) with international best practices.
- The mission met with senior NBU officials including: Mr. Yuriy Heleteiy (Deputy Governor), Mr. Ihor Pronin (Director, Credit Analysis and Liquidity Support Department), Mrs. Pervin Dadashova (Director, Financial Stability Department), Mr. Serhii Demydenko (Director, Risk Management Department), Mr. Oleksandr Arseniuk (Acting Director, Open Market Operations Department), Mr. Andrii Kotiuzhynskyi (Director, Integrated Banking Supervision Department), Mr. Oleksandr Pushkar (Deputy Director, Credit Analysis and Liquidity Support Department), and Mr. Mykola Selekhman (Deputy Director, Open Market Operations Department), as well as other senior staff.
- The report presents the mission’s assessment and main conclusions.

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### Executive Summary

- The mission reviewed:
  - NBU’s counterparty eligibility criteria for monetary policy lending operations.
  - NBU’s Emergency Liquidity Assistance (ELA) framework.
- Safeguards Assessment reports (2019 and 2023) identified the need to align counterparty eligibility with leading practices, notably by including compliance and monitoring of counterparties’ financial soundness.
- Main assessment points and recommendations:
  - Amend counterparty eligibility criteria to introduce financial soundness requirements.
  - Implement automatic access limitation measures for non-compliance with solvency requirements; these measures should be as automatic as possible within a rules-based framework.
  - Institutionalize dialogue between banking supervision and market operations to enable proactive limitation/suspension of counterparties.
  - ELA Regulation is comprehensive and broadly aligned with best practices but has gaps:
    - Expand collateral eligible for ELA to include assets eligible for monetary policy operations.
    - Work with the Ministry of Finance (MoF) toward a Memorandum of Understanding (MoU) on information exchanges and explore government guarantees in particularly risky ELA cases.
    - Set ELA interest rate as a fixed spread over the overnight loans rate.
    - Clearly set ELA loan maturity at a maximum of two weeks, renewable.
  - Operational readiness improvements:
    - Streamline and test mobilization processes for credit claims used as ELA collateral and explore prepositioning of credit claims.
    - Improve ELA governance, internal organization and communication.
    - Conduct ELA simulations using real data to test procedures and identify improvements.

*Italic: Source: tarea2025067-print-pdf - Preface*

### Key Recommendations (Table 1 highlights)

- Counterparty eligibility for Monetary Policy Operations:
  - Amend eligibility criteria for counterparties to participate in MPOs to include financial soundness criteria, rooted in solvency. Priority: High. Timeframe: Near-term. ¶34, ¶35
  - Introduce a new counterparty measure of limitation. Priority: High. Timeframe: Near-term. ¶36
  - Ensure measures regarding counterparties access to monetary policy operations are as automatic as possible, within a framework of rules. Priority: High. Timeframe: Near-term. ¶37
  - Set-up an institutionalized dialogue between banking supervision and markets operations, so counterparties can be pro-actively limited/suspended. Priority: High. Timeframe: Near-term. ¶38
  - Prepare an implementation strategy and roadmap regarding the new eligibility criteria and measures. Priority: High. Timeframe: Medium-term. ¶39

- Emergency Liquidity Assistance and its Collateral Framework:
  - Set the interest rate on ELA as a fixed spread over the overnight loans rate. Priority: High. Timeframe: Near-term. ¶59
  - Set the maturity of any ELA loan at up to two weeks. Priority: High. Timeframe: Near-term. ¶61
  - Add collateral accepted for monetary policy operations to the eligible collateral for ELA. Priority: High. Timeframe: Near-term. ¶66
  - Further streamline the processes for the mobilization of credit claims as ELA collateral and test the mobilization of credit claims with banks, in real conditions. Priority: High. Timeframe: Medium-term. ¶68, ¶69, ¶71, ¶72, ¶73
  - Explore the prepositioning of credit claims for ELA collateral. Priority: High. Timeframe: Medium-term. ¶68, ¶69
  - Work with the Ministry of Finance towards an MoU on information exchanges and explore the use of government guarantees in certain ELA situations. Priority: High. Timeframe: Near-term. ¶75
  - Create an ELA Team, composed of 2-3 staff from each involved Department to ensure speed and a restricted circulation of information. Priority: High. Timeframe: Near-term. ¶91
  - Regularly conduct ELA simulations. Priority: High. Timeframe: Medium-term. ¶93
  - Prepare a communication strategy on ELA. Priority: High. Timeframe: Medium-term. ¶96

- Timeframe definitions:
  - Near term: < 12 months.
  - Medium term: 12 to 24 months.

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### I. Introduction

### Purpose and scope
- NBU intends to enhance readiness to respond to banking system crises while strengthening mechanisms to protect its balance sheet.
- Two focal aspects:
  - Review counterparty eligibility criteria for monetary policy operations (introducing financial soundness requirements).
  - Strengthen and operationalize the NBU’s ELA framework.

### Safeguards context
- 2019 Safeguards Assessment highlighted reviewing counterparty eligibility criteria to include compliance and monitoring of financial soundness.
- 2023 Safeguards Assessment reiterated that NBU’s counterparty eligibility requirements do not include compliance with regulatory requirements, such as capital adequacy, exposing the NBU to additional risks and inconsistent with leading practices.
- NBU established an ELA framework in 2016 following LOLR experiences, but the framework has gaps and lacks operational readiness in some respects; 2023 Safeguards Assessment identified ELA as an area needing improvement.

*Italic: Source: tarea2025067-print-pdf - Preface*

### The financial system and the monetary policy operational framework — key facts and statistics

- Banking system structure and funding:
  - Number of banks: 62.
  - Total banking assets: 3.2 TN UAH.
  - Ownership composition:
    - Government-owned banks: 7, accounting for just over half of total bank assets.
    - Foreign-owned banks: 14, accounting for about 30 percent of assets.
    - Privately owned banks: 42.
  - Funding: Banks are 93 percent funded by deposits.
  - All foreign banks are owned by euro area banks.2

- Reserve requirements (exact rates and features preserved):
  - All counterparties must fulfill a reserve requirement, up to 35 percent of FX-denominated deposits.
  - NBU reserve requirements for domestic currency:
    - 25 percent for consumer deposits (except deposits with minimum initial maturity of 93 and more calendar days, which require 0 percent reserve ratio).
    - 15 percent for corporate deposits.
  - For FX-denominated liabilities:
    - Requirements increase to 25 percent and 35 percent respectively (15 percent for consumer deposits with minimum initial maturity of 93 and more calendar days).
  - 60 percent of total reserve requirements can be fulfilled with Ukrainian government bonds at par value.
  - NBU uses reserve requirements to steer liquidity conditions; only banks have access to Monetary Policy Operations (MPOs).3
  - The NBU increased reserve requirements by 5 percentage points as recently as October 2024.

- Monetary policy operational regime and instruments:
  - Post-invasion liquidity regime: excess liquidity; decision in October 2023 to operate in a floor system/regime.
  - Tenders are operated on a demand-basis, with no restriction on the amount of liquidity that can be provided if sufficient collateral is available.
  - Key policy rate (KPR): NBU steers interest rates through a floor-system, using its deposit rate as the de jure KPR.
  - Since the full-scale military invasion in 2022, the key policy rate changed to the overnight CD-rate, which currently stands at 13 percent.
  - Main MPOs and instruments:
    - Long- and short-term refinancing operations.
    - Liquidity-absorbing two-week certificate of deposit (CD).
    - Collateral framework: narrow, mostly consisting of government debt securities (including domestic municipal bonds); collateral must be unencumbered, valued at fair value, haircut depends on remaining duration and coupon rate.
    - Other accepted MPO assets: bonds of international financial institutions, NBU's CDs and foreign currency.
  - Excess liquidity projection: excess liquidity is forecast to decrease and normalize near mid-2026.

- Interbank market and implications:
  - Interbank money markets are currently not active; secured activity is most dominant.
  - Excess liquidity depresses the interbank credit market; number and volume of transactions are currently very small.
  - Absence of market-based options elevates the NBU’s role in liquidity provision during shocks, increasing the importance of financial risk management and protections against counterparty-specific risks (risk management, business model, etc.).
  - The NBU’s narrow collateral framework mitigates some risk, but NBU lacks sufficient protection against counterparty risk compared with best practices.

- Role of ELA:
  - ELA is the ultimate line of defense against liquidity shocks.
  - Sequence: money markets to redistribute reserves → central bank standard operations and facilities → ELA as last line of defense when shocks are idiosyncratic but deepen or become system-wide.
  - Distinction between ELA and liquidity-providing monetary operations:
    - ELA goal: financial stability.
    - MPO goal: price stability.
    - ELA entails stronger conditionalities, shorter tenors, and closer scrutiny when counterparty solvency is doubtful.
  - The mission focuses on improving and strengthening the ELA framework and making it operationally viable.

*Italic: Source: tarea2025067-print-pdf - Preface*

### 13. The NBU provides monetary policy operations to counterparties that fulfill the necessary

### 13. The NBU provides monetary policy operations to counterparties that fulfill the necessary

### Eligibility conditions and legal basis
- Conditions for MPO participation are operational, no-arbitrage and prudential in nature, and include fulfilling a reserve requirement.
- Eligibility requirements differ by MPO type (e.g., longer vs. shorter term refinancing operations) and include monetary policy–oriented conditions to ensure smooth transmission and no arbitrage between operations.
- Legal and regulatory roots:
  - Stem from the Law of Ukraine on the National Bank of Ukraine (NBU Law).
  - Further specified in Regulation 615 from the NBU.
  - Amended by martial law measures (Resolution 22 and 23):
    - Resolution 22 excludes foreign-owned entities from Russia and Belarus.
    - Resolution 23 gave banks a temporary waiver for solvency and liquidity requirements insofar as breaches stem from the invasion by Russia.
- Current practice: no direct proactive solvency/financial soundness requirements in NBU eligibility criteria; NBU excludes counterparties only when declared insolvent. A banking license is required.

### Interaction with prudential framework and Problem bank designation
- “Problem bank” designation is a supervisory decision based on solvency concerns, liquidity concerns or broader ownership/transparency violations.
- Breakdown of Problem bank designation reasons:
  - 45 percent of the designation refers to solvency or liquidity concerns.
  - 55 percent relate to other concerns.
- Outcome and operational effects:
  - Survival rate: 75 percent of Problem banks were liquidated after receiving the designation (for the period 2015-2024).
  - If designated Problem Bank by prudential function, MPO operational systems automatically disallow participation in longer term MPOs (access to shorter term MPOs is maintained).
  - Open Markets Department (OMOD) is not informed when a bank is declared Problem bank.
- Risk: continuation of short-term liquidity provisioning to Problem Banks may expose the NBU to potential losses due to higher default probability.

### Financial soundness principles and monitoring
- Central bank risk management principle: do not provide credit to an insolvent counterparty.
- Recommended approach:
  - Assess counterparty solvency in real-time and implement proactive (automatic) measures, at least for liquidity-providing operations.
  - Complement solvency checks with supervisory and operational criteria and a collateral framework (dual recourse).
  - Treat counterparties equally and avoid requirements above legal/prudential minima to ensure broad participation and homogeneous monetary transmission.
- Example minimum solvency benchmarks (Basel-III Pillar 1 minima suggested):
  - at least 4.5 percent CET1; six percent Tier 1; eight percent Total Capital; three percent Leverage-ratios.
- Liquidity ratios:
  - Monitor liquidity ratios (e.g., LCR; NSFR <100 percent for Basel-III) and use breaches for enhanced monitoring, but breaches should not automatically trigger limitation, suspension or exclusion from MPOs.
- Monitoring sources and limitations:
  - Prudential reporting (e.g., quarterly supervisory data) provides backward-looking checks.
  - Markets department can use market intelligence for more up-to-date signals (recourse to lending operations, collateral, credit ratings, market indicators, news, covered bonds holdings).
  - Automated supervisory reporting lags; therefore establish information exchange between supervision and markets based ideally on ‘live’ data.
- Supervisory triggers to inform Markets proactively include adverse developments in Pillar 1 own fund requirements, liquidity requirements, imposition of supervisory actions (management removal/appointment of temporary administrator; formation of formal crisis management team; withdrawal of banking license).

### Discretionary and automatic measures framework
- Principle: measures limiting access to MPOs should be rule-based and automatic where possible; entrance/on-boarding criteria on financial soundness should be equal for all counterparties with no ex-ante discretion.
- Three possible measures for counterparties:
  - Limitation: exposure cannot be increased further; outstanding operations can be rolled over but not increased; additional collateral restrictions may apply; temporary with set timeline and can be removed or escalated.
  - Suspension: prohibited from further MPO participation and required to repay outstanding amounts in full; access to payment systems/gross settlement may remain; triggered if financial soundness cannot be guaranteed or restored within a reasonable timeframe.
  - Exclusion: immediate termination of MPO access; repayment of outstanding operations in full; all legal contracts terminated.
- Grace period and timing (based on Eurosystem example):
  - Automatic limitation should apply as soon as non-compliance or non-reporting of financial soundness requirements is identified.
  - A grace period up to several weeks (up to eight weeks in the Eurosystem) gives time to restore solvency if non-compliance is temporary.
  - If the breach is found in the automated reporting exercise, the grace period is six weeks.
  - Supervisor should indicate quickly (within two weeks) whether non-compliance is expected to be temporary.
  - If non-compliance is not temporary, suspension should occur immediately; suspension also if solvency not restored within the grace period.
  - Reinstatement to full MPO access occurs upon confirmation by the supervisor that solvency conditions are restored.
  - Exclusion only when non-compliance is expected to never recover (e.g., default).
- Discretionary measures: possible when there is high certainty about counterparty deterioration; supervisory dialogue can provide earlier warning so Markets can act automatically; experience may inform additional automatic rules.

### Emergency Liquidity Assistance (ELA) relationship
- When a counterparty is excluded, suspended or limited, the only additional central bank liquidity source would be ELA, which falls outside regular liquidity provisioning and is a last resort.

### Findings on current NBU framework and recommendations
- Current state:
  - NBU has operational and supervisory requirements but lacks explicit financial soundness criteria in its counterparty rules.
  - NBU can effectively suspend counterparties but lacks a formal limitation measure.
- Recommended amendments and actions:
  - Amend counterparty framework to include broad financial soundness criteria, at least on solvency (e.g., minimum Pillar 1 capital requirements consistent with global standards).
  - Apply these criteria ex-ante at onboarding and during the life of the counterparty; share revised framework transparently with counterparties (e.g., website and/or updated Terms & conditions for counterparties).
  - Introduce the option of limitation as an intermediate measure alongside suspension and exclusion; use a grace period to enable recapitalization and avoid abrupt liquidity withdrawals.
  - Make measures rule-based and automatic where possible, applying at least to all liquidity-providing MPOs regardless of maturity.
  - Institutionalize a dialogue between Integrated Banking Supervision Department (IBSD) and Open Market Operations Department (OMOD), complemented by automated prudential reporting:
    - IBSD should signal doubts on solvency prospects to OMOD to trigger prudential measures (e.g., limitation with grace period).
    - Automatic measures should be applied by OMOD with immediate notification to the NBU Board; discretionary measures proposed by OMOD and decided by the NBU Board.
    - Explore whether Problem Bank status should be shared with OMOD and lead to automatic actions (e.g., limitation), as a complement to solvency criteria.
  - Phase in new eligibility criteria and measures soon, provided negative short-term effects on financial stability are avoided; ensure ELA is operationally available as a liquidity backstop for banks that are suspended.

### Emergency Liquidity Assistance (ELA) practice and experience
- NBU established an ELA framework in 2016; some prior Lender of Last Resort loans resulted in significant losses.
- Since 2016, seven banks requested ELA:
  - three requests were rejected because the banks had Russian shareholders (requests occurred after the Russian invasion of Ukraine in 2022).
  - two were rejected because it was assessed those banks did not have an impact on financial stability.
  - two did not follow through with the ELA request.
- For the two cases that progressed, analysis took around three weeks, including circa two weeks for collateral due diligence and one week to make the final decision.
- Outcome: of the seven banks that requested ELA, only one is still in operation.

*IMF Technical Assistance Report*

### 41. The recent NBU experiences with the preparation of responses to ELA requests

### 41. The recent NBU experiences with the preparation of responses to ELA requests

### Key findings and objective response-time
- The current ELA framework should be revamped to allow for a significant improvement of the response times to ELA requests.
- The NBU should aim at responding to an ELA request in a maximum of 24 to 48 hours.

### Legal basis
- The NBU Law:
  - Article 6 (part 3) provides the NBU with the responsibility of promoting financial stability, including the stability of the banking system.
  - Article 7 (part 1, paragraph 3) states that the NBU acts as lender of last resort for banks.
- Article 42 part 1 paragraph 1 of the Law on the NBU provides that the NBU grants loans to banks to maintain liquidity at a rate not lower than the NBU's refinancing rate and in accordance with the procedure set by the NBU.
- The NBU Law does not detail the main conditions or parameters for the provision of LOLR loans to banks; since 2016 a comprehensive ELA framework is in place detailing conditions, parameters, and processes.

### ELA regulation: overall assessment and remaining gaps
- The NBU’s ELA Regulation is comprehensive and broadly aligned with best practices, but two major gaps remain:
  - Non-acceptance as collateral for ELA of the assets that are eligible for monetary policy operations.
  - The conditions under which ELA can only be provided with a government guarantee should be specified.
- Additional adjustments recommended:
  - Further refinement of ELA parameters regarding pricing and maturity.
  - Reinforce the role of conditionality for ELA provision.
  - Strengthen ability to conduct forward-looking assessments of solvency.

### Forward-looking solvency and viability
- ELA can only be provided to solvent banks; solvency is defined in a forward-looking manner (Article 6 of ELA Regulation).
- Based on the forward-looking definition, if a bank temporarily does not comply with prudential capital requirements but has a credible prospect of restoring appropriate capital ratios in the near future (i.e., not more than six months), the bank should be considered fundamentally solvent and could legally have access to ELA.
- Operational recommendations:
  - Develop a template for a synthetic assessment of solvency that includes:
    - (i) an overview of the bank’s latest capital adequacy ratios;
    - (ii) a summary of developments in those ratios in the past quarters and years;
    - (iii) relevant information related to expected profitability, asset quality, developments in non-performing loans, provisioning policies;
    - (iv) an assessment of the bank’s ability to maintain or restore appropriate capital adequacy ratios through measures such as deleveraging and recapitalization;
    - (v) forward-looking information on the prospect for a recapitalization of the bank, including ability and willingness of current shareholders to provide fresh capital and interest of potential investors (including the State).
  - Ensure active participation of the IBSD in forward-looking solvency assessments even when FSD oversees the analysis.

### Assessment of last-resort situation and conditionality
- ELA should be possible only after exhaustion of all other alternative funding sources, including the interbank credit market and standard instruments for regulating system liquidity.
- Measures to ensure ELA is last resort:
  - Interest rate should be high (at least 200 basis points above the rate of the marginal lending facility).
  - Strict conditionality attached to emergency liquidity.
  - Intrusive supervisory measures can be implemented.
- ELA should not substitute for intragroup funding; ELA is preferably provided at the parent bank’s level.
- NBU should regularly discuss intragroup funding and liquidity risks with relevant foreign central banks and supervisors (e.g., in supervisory colleges).
- Where foreign supervisors (e.g., Euro Area) are unwilling to share supervisory information due to data protection equivalence issues, ELA to subsidiaries should be accompanied by measures preventing ELA loans from being channeled to the parent bank.

### Assessment of risks to financial stability
- The Financial Stability Department (FSD) assesses a bank’s potential impact on financial system stability considering:
  - quantitative and qualitative activity parameters;
  - state of the banking and financial system;
  - macroeconomic environment;
  - presence of systemic risks;
  - regional relevance.
- Of seven banks that requested ELA, two were considered as not having an impact on financial stability and were not supported; these two were declared insolvent without an impact on the stability of the financial system.
- FSD evaluation should include:
  - a) Evaluation of systemic character using: (i) size/market share (deposits, loans); (ii) connections with other domestic banks and financial institutions; (iii) role in financing the government and certain economic sectors; (iv) provision of critical financial functions; and (v) regional relevance.
  - b) Evaluation of contagion risk (e.g., flight of deposits from other local banks).

### ELA interest rate
- NBU’s ELA Regulation defines ELA interest rate as the NBU’s key policy rate plus two percentage points.
- This implies the ELA interest rate currently stands at 15 percent, while the overnight loan facility stands at 16 percent.
- Recommendation:
  - Define the ELA interest rate as a fixed spread (for instance, of 200 bps) over the overnight lending facility rather than the key policy rate to maintain its penalty nature and avoid ELA being less expensive than the overnight lending facility.

### ELA maturity and time limits
- Current regulation: ELA loan maturity of up to 90 days, extendable by up to 90 days, not exceeding a total duration of one year; amounts (tranches) recalibrated based on a short-term (two-weeks) liquidity forecast.
- Recommendation:
  - Set the maturity of any ELA loan at up to two weeks to:
    - avoid excessive calibration of the ELA envelope given difficulty assessing liquidity needs over 90 days;
    - align frequency of approvals and extensions with need for frequent updates and monitoring;
    - emphasize conditionality and requirement for bank’s continued remedial efforts.

### Collateral framework for ELA
- ELA loans must be collateralized; NBU has the right to establish priority of accepted collateral and can refuse collateral under certain conditions.
- Current eligible collateral for ELA (excerpt from Annex):
  1. Guarantees of the Cabinet of Ministers of Ukraine
  2. Guarantees of national governments
  3. Corporate bonds (except for target bonds), bonds of the State Mortgage Institution
  4. Guarantees of International Financial Institutions
  5. Guarantees of non-resident banks and/or non-resident financial institutions
  6. Precious metals
  7. Immovable property (except for unfinished construction)
  8. Property rights under loan agreements concluded by the borrowing bank with legal entities (except banks, budgetary institutions) secured by a mortgage, except for unfinished construction projects
  9. Property rights under loan agreements with individuals secured by a mortgage, except for objects of unfinished construction
  10. Property rights under loan agreements concluded by the borrowing bank with individuals, except for property rights specified in line nine of Table 1
- The ELA framework currently does not accept as collateral the assets accepted for monetary policy operations (e.g., Government Securities and foreign currency); for ELA accepted assets include corporate bonds, precious metals, real estate and certain credit claims; the NBU can accept government and IFI guarantees.
- Haircuts:
  - Published haircuts range from 10 percent (Guarantees of the Cabinet of Ministers of Ukraine) to 80 percent (some categories of credit claims).
  - For Government Securities accepted to monetary policy operations haircuts range from five percent to 55 percent, depending on currency, maturity and coupon.
- Transparency:
  - The ELA collateral framework is highly transparent; this facilitates bank preparedness but can limit central bank discretion in complex situations. Given past experiences, NBU’s preference for transparency is justified, but some discretion should be preserved.
- Recommendation:
  - Add collateral accepted for monetary policy operations to the eligible collateral for ELA, with an appropriate haircut.
  - Contextual statistic: On average, government bonds represent 26 percent of Ukrainian banks’ assets, corporate loans around 25 percent and retail loans around eight percent.

### NBU historical experience and operational lessons
- Stabilization Loans:
  - Issued to 39 banks; 20 banks repaid loans; 19 banks outstanding loans.
  - Only six of the 39 banks that received Stabilization Loans are currently in operation; the remainder were either liquidated or are under liquidation.
  - Stabilization Loans were mainly collateralized by banks’ loan and real estate portfolios due to insufficient high-quality assets.
  - NBU recognized failures to recover loans where the Deposit Guarantee Fund (DGF) did not transfer proceeds from collateral disposal and management to the NBU, increasing NBU losses while DGF used proceeds to satisfy deposits of failed banks.
  - Institutional changes after experience:
    - Reinforced legal ability to appropriate collateral (senior legal creditor status to NBU).
    - Clarified coordination mechanisms with the DGF in case of bank insolvency.
    - Emergency liquidity provision moved from the Banking Supervision Department to the Credit Analysis and Liquidity Support Department.
    - An ELA framework has been put in place.
- Unsecured loan example (2016):
  - NBU provided a seven-day unsecured loan to a systemically important failing bank being nationalized; loan repaid in full after nationalization.
  - Government injected capital via Government bonds which the NBU was the main buyer of.
  - NBU is working on a resolution framework in parallel to establishing the ELA framework.

*Source: IMF mission team.*

### 66. The NBU’s ELA regulation should more clearly affirm the discretionary nature of the

### The NBU’s ELA regulation should more clearly affirm the discretionary nature of the

### Discretion over selection and composition of ELA collateral
- Recommendation: Clarify that the central bank has discretionary choice over which eligible assets will be mobilized as ELA collateral.
- Specific clarifications suggested:
  - (i) The bank requesting ELA must regularly provide an exhaustive list of its eligible assets, for the NBU to select which assets will be mobilized as ELA collateral.
  - (ii) The composition of the ELA collateral pool may change at the initiative of the NBU (i.e., some eligible assets may be replaced by other eligible assets, or additional assets may be mobilized to better collateralize the ELA loan).

### Collateral prepositioning and mobilization operational issues
- Finding: A critical operational challenge to activate ELA is the quick mobilization of sufficient collateral, particularly as ELA collateral is typically focused on illiquid assets (credit claims), which take much more time to mobilize and assess than securities.
- Recommendation: The NBU should regularly scan each bank’s collateral and ability to deal with outflows from runnable liabilities, and consider prepositioning illiquid collateral (e.g., high-quality credit claims) for all banks or only systemic banks, for a percentage of their assets or runnable liabilities, on the basis of such assessment.
- Recommendation: Encourage banks to preposition collateral (especially credit claims) and conduct regular tests for its mobilization.
  - Prepositioning details:
    - Identify, verify eligibility of, and validate collateral without transferring legal title to the central bank during this stage.
    - Once due diligence is satisfactorily completed, collateral is considered prepositioned and ready to be drawn against, subject to the approval of the central bank; the collateral will be encumbered at that time.
    - Prepositioning facilitates identifying asset features relevant to valuation and risk control design, improving central bank market intelligence.

### Haircuts and transparency
- Recommendation: Published ELA haircuts should be described as minimum haircuts to reconcile transparency with protection of central bank discretion.
  - Rationale: Presenting haircuts as minimums allows the NBU to apply more conservative haircuts (without disclosing them) if required for risk management, producing an “asymmetric” transparency—reassuring stakeholders about strict baseline rules while preserving discretion to implement stricter measures to mitigate ELA abuse.

### Legal constraints and testing for credit-claim mobilization
- Finding: Credit claims cannot be transferred to the NBU’s account like common tradable financial assets; ensuring they can be swiftly realized in the event of a bank’s default is crucial.
- Recommendations:
  - The NBU’s Legal Department should decide on the best approach to guarantee full transferability and mobilization of credit claims for the benefit of the NBU.
  - Assess possibility of factoring routine procedures (e.g., loan mobilizations, demobilizations, feature changes) into an initial Agreement to reduce bureaucratic burden on successive credit claims reports.
  - Confirm legal formalities for valid mobilization of credit claims, in particular the need to deliver the loan contract physically or electronically, and whether debtors must be notified.
  - Test credit claims mobilization in real conditions with (systemic) banks once verifications are completed to bolster preparedness.

### Acceptance criteria and valuation of credit claims
- Finding: The NBU establishes several criteria for acceptance of credit claims as collateral; application of these criteria significantly reduces the volume of mobilizable credit claims.
  - Internal NBU analysis found that the application of the criteria would lead to the acceptance of less than 15 percent of the total volume of credit claims on the bank’s balance sheet.
- Alternative approach discussed:
  - Accept all credit claims but apply very high haircuts (i.e., from 80 percent to 100 percent) to riskier claims.
  - Given current conditions—very high NPLs in the banking system at present (around 40 percent)—the current NBU approach is considered prudent.
  - Relaxing some criteria to accept a wider pool of credit claims could be considered to alleviate pockets of stress, with additional risk mitigation measures.
- Offer: Further IMF technical assistance on streamlining the credit claims mobilization process and on defining haircuts and valuation metrics can be provided.

### Government’s role and conditions for government guarantees
- Recommendation: Specify, subject to the Ministry of Finance’s agreement and possibly necessary legal changes, under which conditions ELA can only be provided with a government guarantee, with strict conditions and safeguards.
- Principle: ELA should be extended where necessary, to preserve financial stability, only with a government guarantee (as complement, rather than substitute, of collateral, and of credible action to restore solvency, outside or within resolution) in the following situations:
  - i. Significant uncertainty on solvency: ELA may be considered only under a government guarantee, as complement to collateral and a credible action to address temporary undercapitalization. ELA must not be provided without full efforts to collateralize and a detailed recapitalization plan. If the bank is clearly insolvent with no credible recapitalization plan, ELA must not be provided.
  - ii. Insufficient collateral: ELA may be considered with a government guarantee to fill the collateral gap. Collateral must be mobilized as much as possible with sound risk control measures; a credible recapitalization plan should probably be envisioned. If no credible plan exists, ELA must not be provided.
  - iii. Funding-in-resolution: If ongoing resolution is expected to produce a solvent, viable bank in the near term, ELA may be envisioned for funding-in-resolution only under a government guarantee if the central bank has concerns on the exit strategy. All efforts must be made to obtain sufficient collateral; government guarantee is a second layer of protection and a complement, not a substitute. In a good bank/bad bank separation, only the good bank may be eligible; in a bank liquidation, ELA must not be provided (regardless of a government guarantee).

### Memorandum of Understanding with the Ministry of Finance
- Recommendation: The NBU should work with the Ministry of Finance (MoF) towards a Memorandum of Understanding (MoU) defining information exchanges, safeguards, and the conditions requiring a government guarantee in certain ELA situations.
- Implementation points:
  - Establish and operationalize strict safeguards (strict assessment of solvency and viability, strict collateralization with conservative haircuts, strict conditionality) in the ELA framework to reassure MoF that fiscal risks will be mitigated.
  - Information exchanges should provide sufficient clarity on the bank’s solvency, viability, collateral, and compliance to allow MoF to make an informed decision on a possible government guarantee.
  - Clarify the process for putting a guarantee in place as part of ELA preparedness.

### Conditionality and corrective measures
- Principle: No ELA should be provided without conditions, enshrined in an agreement with the bank and monitored through a funding plan.
  - Purpose of conditionality: (i) accompany the bank in implementing measures to address vulnerabilities; (ii) control the central bank’s risk by strengthening monitoring and imposing measures to reduce risk; (iii) ensure ELA is only used as last resort.
- Current NBU practice: Section VII of NBU’s ELA Regulation allows the NBU to impose restrictions and requirements (e.g., prohibition on distribution of capital, early repayment of debt securities, active transactions with related persons).
- Recommendation: Expand conditionality beyond restrictions and prohibitions to include corrective measures such as sale of non-core assets and reinforced reporting obligations.
  - Examples of corrective measures (Box 3 example set):
    - Obligation of reporting more frequent information on the bank’s liquidity and capital position
    - Suspension of dividend distributions and debt or share buybacks
    - Suspension or pre-approval procedure for new significant investments
    - Measures to limit the granting of new loans (e.g., through limits, prior notification or pre-approval procedures)
    - Conditions on recovery efforts for non-performing loans
    - No bonuses, or salary increases for administration
    - No up-streaming to foreign parent bank
    - Enhanced obligations on anti-money laundering
    - Sale of non-core assets
    - Measures to stabilize deposits and restore market access
    - Measures to strengthen capital adequacy (e.g., recapitalization)
    - Obligation to carry out asset quality reviews and external audits at the request of the Central Bank, at the bank’s expense, and to share their results with the Central Bank

### ELA General Agreement, tailorability, and publication options
- Current status: Provision of ELA is conditional on signing an ELA General Agreement. The NBU has developed a template and such an Agreement has been signed by two banks in the past (though they did not receive ELA).
- Recommendation: Consider publishing the ELA General Agreement as a technical, non-legally-binding document distinct from the regulation, or transmitting it to banks for information (e.g., in a seminar), to facilitate bank preparation.
  - Note: Publishing the template has pros and cons—deviations could give rise to controversies or be contested by beneficiary banks. Most central banks do not publish their ELA General Agreement.
- Recommendation: Tailor the ELA Agreement to specific bank situations using “building blocks” approach.
  - Core building blocks (typical): General provisions; Purpose of the ELA loan; Provision of the full list of eligible (unencumbered) assets; Collateral management; Extension of the ELA loan; Repayment; Participation in the central bank’s monetary operations and standing facilities (if retained); Prohibition of interbank deposits; Enhanced reporting obligations; Penalties; Settlement of disputes; Termination of contract.
  - Complementary building blocks (as needed): Lending and investment policies (reinforced info obligations, prior approval, freezes); Asset sales obligations; Mergers & acquisitions provisions; Salaries, bonuses, dividends restrictions; Prohibition of loans to related parties; Reinforced AML/CFT obligations; Audits and asset quality reviews (results shared with central bank).

### Funding plan use, templates, and monitoring
- Recommendation: The NBU should use and may publish a funding plan template with appropriate granularity for ELA assessment and monitoring.
  - The NBU already developed a funding plan template used under Regulations 411, 783, and 457; this template should be used and its granularity adjusted to facilitate analysis while avoiding overcomplication for banks.
  - Emphasis for Ukrainian banks: sufficient granularity on loan books, securities portfolios, and deposit categories.
- Operational guidance:
  - For the duration of ELA provision, the funding plan should be updated monthly or quarterly.
  - The funding plan should allow an iterative feedback process with the banking supervisor to ensure quality and credibility.
- Funding plan quality criteria (para. 83):
  - The funding plan submitted by a bank under ELA should be: (i) credible; (ii) detailed and specific; and (iii) it should reflect the bank’s best effort.
  - The NBU must challenge the bank’s assumptions (e.g., on deposit growth, restoration of interbank access, timing of recapitalization or asset sales). If the plan is insufficiently ambitious (e.g., reliance on ELA for an extended period), the banking supervisor should challenge the strategy and push for more ambitious remedial measures (asset sales, recapitalization, restore market access, freeze on new loans, etc.).

*IMF Technical Assistance Report | Extracted content unit*

### 84. Each new funding plan should be accompanied by written explanations on the bank’s

### Each new funding plan should be accompanied by written explanations on the bank’s strategy and presented by the bank’s senior management.

### Funding plans: purpose and assessment
- Each new funding plan should be accompanied by written explanations on the bank’s strategy and presented by the bank’s senior management.
- The funding plan should reflect the bank’s senior management’s commitment vis-à-vis the central bank.
- The central bank should provide a set of objectives, hypotheses and constraints (for example, “the full repayment of ELA before a certain deadline”), while leaving sufficient leeway to the bank to express its strategy through its funding plan.
- The assessment of the funding plan by the banking supervisor and the central bank should focus on:
  - (i) its credibility;
  - (ii) deviations between realized and forecast balance sheet data;
  - (iii) revisions in successive funding plan versions; and
  - (iv) the causes, endogenous or exogenous to the banks, for those deviations.
- Funding plans are useful for:
  - providing a quantitative basis for discussing the bank’s remedial actions, and
  - enabling an iterative comparison between the bank’s plans and its realizations.
- Depending on the assessment of causes of negative deviations from targets set by the central bank (such as delays in repaying ELA), the central bank may adjust its ELA decisions, for instance by strengthening the conditionality framework and/or increasing overcollateralization if concerned by risks of non-compliance.

### Decision making
- The NBU Board decides on each individual ELA request.
- While standard loans under the NBU’s monetary policy framework do not require special NBU Board approval, the NBU Board, advised by the Credit Committee, decides on each individual ELA request based on a proposal by the ELA Team, coordinated by the Director of CALSD.

### Internal procedures and ELA Team composition
- The NBU has an extensive ELA procedure involving 11 departments. Main participants include:
  - Integrated Banking Supervision Department (IBSD),
  - Financial Stability Department (FSD),
  - Credit Analysis and Liquidity Support Department (CALSD),
  - Risk Management Department (RMD), and
  - Legal Department.
- The CALSD leads and coordinates any ELA request.
- A key operational objective is to set up an ELA request assessment process that can be handled quickly in 24 to 48 hours.
- Current practice: the NBU’s ELA regulation is compliant with many best practices but is in practice too inefficient and can take up to three or four weeks for an ELA request to be processed; this delay is largely due to collateral mobilization issues and the large number of departments and staff involved.
- The NBU should create an ELA Team, coordinated by the CALSD, composed of 2/3 staff from each involved Department to ensure speed and confidentiality.
- The ELA Team should minimize the number of people involved to increase efficiency and prevent leaks: maximum of about 20 people; one manager and 2/3 staff per department.
- Team members should be freed from other ongoing work as much as possible; processes should be executed in parallel rather than sequentially.
- The assessment may be shared later with a broader group for learning and education purposes; frequent testing can increase process efficiency.
- Proposed shift in division of labor: reduce FSD involvement and strengthen Banking Supervision’s forward-looking and holistic view on bank solvency, liquidity, and asset quality. FSD could be limited to assessing systemic relevance and overseeing forward-looking solvency assessment.

### ELA preparedness: training, simulations, and communication
- The NBU should conduct annual ELA simulations to train staff on ELA procedures and identify gaps and vulnerabilities, using real local banks’ situations combined with a simulated liquidity shock.
- Regular training on ELA principles should be organized across departments involved in ELA (financial stability, monetary policy, banking supervision, risk management, communications, legal).
- Workshops with banks should clarify ELA requirements, particularly the need for pre-mobilization of sufficient collateral and signing a highly constraining ELA agreement prior to receiving any ELA.
- The NBU should develop a communication strategy and policy for ELA comprising:
  - (i) an ex-ante transparency policy;
  - (ii) a communication strategy around on-going ELA; and
  - (iii) an ex-post transparency policy.
- Ex-ante disclosure objectives include:
  - managing expectations of ELA stakeholders;
  - highlighting that ELA is for the liquidity needs of solvent and viable institutions; and
  - ensuring central bank accountability and sound governance.
- Ongoing ELA operations should generally be treated with strict confidentiality, but the NBU should be prepared to publicly communicate on ELA in systemic crises or where negative rumors are widespread; such public approaches should be coordinated with ELA beneficiaries.
- Ex-post transparency can be provided through balance sheet data and the NBU Annual Report; the NBU should assess, with external auditors, whether publishing more detailed information on past ELA (e.g., bank names or individual amounts) might undermine banking confidence or the central bank’s discretion.

### Recommended operational actions to improve ELA preparedness (Box 5)
- Complement the existing Early Warning System (EWS) by relevant liquidity indicators, including:
  - Funding structure of each bank (deviations from the usual funding structure may signal increasing liquidity risks)
  - Funding costs (deposits, interbank borrowings...)
  - Average maturity of interbank borrowings (a sudden shortening may signal creditor concerns)
  - Shifts from unsecured to secured interbank borrowings
  - Breakdown of insured vs. uninsured deposits (significant additions of beneficiaries to bank accounts may signal concerns on a bank’s soundness)
  - Mapping of the interbank market, based on observed transactions within the past 12 months (identification of nodes, interconnections, weak links...)
  - Bidding behavior at the central bank’s liquidity-providing operations
  - Repeated and significant usage of the standing credit facility
  - Shift from frontloading to backloading for the fulfilment of reserve requirements
  - Monetary policy collateral buffers
  - Maturity profile of the monetary policy collateral pool
- Prepare all key technical documents:
  - Funding plan template (already prepared and used by the NBU)
  - Template for funding plan instructions, hypotheses, and targets (already prepared and used by the NBU)
  - Liquidity monitoring template
  - ELA Master Agreement / General agreement (already prepared by the NBU)
  - ELA collateral mobilization forms for credit claims
- Prepare forward-looking solvency assessments, on a semi-annual or annual basis.
- Prepare viability assessments, on an annual basis.
- Prepare assessments of the systemic nature of the banks, on an annual basis (already done by the NBU).
- Assess ELA collateral sufficiency, on a semi-annual or annual basis:
  - Prepare an exhaustive list of ELA eligible credit claims, for each bank.
  - Define a priority order in the mobilization of credit claims (e.g., based on volume, risk, concentration, residual maturities etc.).
  - Calculate the value after haircuts of the ELA collateral pool, for each bank.
  - Define the perimeter of loan mobilization depending on various liquidity risk scenarios.
- Consider pre-emptive mobilization of credit claims (pre-positioning).
- Prepare an ELA request assessment template.
- Inform stakeholders about the ELA framework, rules, and procedures:
  - Banks: seminars, tests
  - Ministry of Finance
  - Relevant NBU staff (e.g., newcomers)
- Conduct simulations:
  - Define multi-disciplinary ELA Teams.
  - Define ELA scenarios / case studies.
  - Test ELA Teams’ ability to coordinate and prepare an ELA assessment based on case studies.
  - Identify errors and gaps in the existing framework and internal procedures.

*Source: IMF Technical Assistance Report*

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_Source: https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025067-print-pdf.pdf_