The Taiwan Banker

This year’s Central Bank of the Year award at the Central Banking Awards 2023 of the industry publication Central Banking was presented to the National Bank of Ukraine (NBU) for its contribution to Ukraine’s financial stability during the Russian invasion. In his acceptance speech, its president Andriy Pyshnyi emphasized that since we can’t predict what the black swans of the future will look like, we must incorporate “antifragility” into our DNA. The financial system is going to be a main battleground for future global conflicts, and it is important to avoid impact as much as possible, as the consequences of a financial collapse are comparable to disruption of blood circulation. Following Russia’s annexation of Crimea in 2014, Ukraine began to systematically study how to improve its financial resilience so that it could maintain financial stability as much as possible in the event of a future military conflict with Russia and ensure the uninterrupted provision of financial services, helping stabilize the morale of the people and build up resistance. 16 emergency measures were drafted prior to the invasion, which came into effect at 10:00 a.m. on February 24, 2022, the day of the invasion. They included measures for public order, maintenance of banking services, and foreign exchange controls. Financial attacks are often precursors of kinetic wars. They can include cyberattacks, market manipulation, misinformation, or complex attacks attempting to paralyze the financial information system, disrupt financial services, create bank runs, and disrupt equity and exchange markets, aiming to create social unrest and demoralize the public. Day zero Martial law was immediately declared on the first day of the Ukraine war. On that basis, in order to reduce panic and maintain confidence in the banking system and financial stability, the NBU adjusted its supervision of the banking system. Since the Ukrainian stock market is very small, the main task at that point was to ensure the continued functioning of the banking system and to control hryvnia depreciation and capital outflows. It took the following measures to allow bank branches to continue operating in safe places, so that the public could continue using safe deposit boxes and withdrawing cash from ATMs: · Maintaining banking system operations 1. Residents were not allowed to withdraw more than 100,000 hryvnia in cash per day (the exchange rate was about 28 to the US dollar at the time). It was completely prohibited to withdraw foreign currency cash, however the government and private companies participating in the mobilization were not subject to this restriction. Furthermore, residents could withdraw domestic cash and foreign currency without restrictions from banks in the occupied areas, if cash was available. 2. Banks could not issue or distribute digital currencies. 3. Ukrainian banks were prohibited from paying any dividends to shareholders other than distribution of preferred stock dividends. Any form of capital distribution was also prohibited other than profits used to increase share capital, provide for provisions, or cover previous-year losses. 4. Except for transactions by the banks themselves, it was prohibited to transfer funds abroad or provide loans to foreign financial institutions. 5. It was prohibited to borrow in hryvnia but require repayment in foreign currency, or visa versa. 6. During the period of martial law, banks were prohibited from raising loan interest rates. At the same time, NBU relaxed general restrictions on banks as follows to help them get through the extraordinary period: 1. The capital adequacy ratio, liquidity, and credit risk standards were temporarily lifted. 2. Banks were permitted to open accounts based on military identification. 3. Sustainability assessment report requirements were extended to 2023. 4. Suspension of financial and consolidated financial statement disclosure requirements. 5. Banks were permitted to use cloud storage services in the EU, UK, US and Canada, helping increase the stability of the banking system. In addition, in order to improve liquidity, NBU introduced one-year blank-slate refinancing loans on February 24, with no upper limit, with the possibility of a one-year extension. As the situation stabilized, banking liquidity increased, and banks began to pay off their refinancing loans early. · Exchange controls In order to prevent the rapid depreciation of the hryvnia in the early days of the war, the NBU fixed the exchange rate on February 24, 2022 (but bank exchange rate controls for cash and card transactions were lifted on May 21, the first step toward the return to floating market exchange rates). Since the beginning of the war, the NBU has controlled the foreign exchange market, and residents can only sell foreign exchange. In addition, it introduced the following measures: 1. Suspension of foreign currency cash withdrawals However the NBU lifted this restriction on March 1, allowing the withdrawal of foreign currency deposits equivalent to up to 30,000 hryvnia per day. On March 21, the limit was raised to the equivalent of 100,000 hryvnia, but on May 20 it was reduced to 50,000 hryvnia per month, except for expenditures related to military and diplomatic activities. At the same time, on April 14, the NBU allowed banks to sell foreign currencies to the public within the total balance of their foreign exchange transactions, with the actual amount depending on the individual situation of each branch. 2. Cross-border transfers temporarily prohibited Cross-border transfers were prohibited at the start of the war. However, due to the large number of Ukrainian refuges overseas needing to pay for living expenses, in early March, the NBU began to allow Ukrainian nationals to make payments and withdraw cash abroad using payment cards. It also allowed Ukrainians abroad to receive their pensions in foreign currencies, and later alimony. 3. Citizens were temporarily allowed to take up to 10,000 euros of foreign currency abroad without providing documentation, but documentation was again required on March 13. 4. Purchase of virtual assets with hryvnia was temporarily prohibited, and with foreign currency was restricted to the equivalent of 100,000 hryvnia per month. The NBU also restricted P2P transactions to the equivalent of 100,000 hryvnia per month. 5. Payments for foreign purchases of securities and brokerage bills were temporarily prohibited using cards issued by Ukrainian banks. 6. Companies were prohibited from purchasing foreign currency for the purpose of repatriating dividends or other investment income, unless the payment was to be made to an international financial institution (IFI), with the consent of the NBU, or to pay interest on domestic sovereign bonds to foreign investors. · Russian and Belarusian financial involvement in Ukraine was eliminated Power Banking From the first days of the war, the NBU prohibited Russian and Belarusian residents from withdrawing cash from Ukrainian banks and from buying and selling foreign currency, including to pay debts. Only later were exceptions approved for expenditures such as social benefits, wages, utilities, taxes, fines, bank fees, and insurance payments. On February 24, the NBU passed a resolution allowing liquidation of Russian-controlled banks. The next day, licenses of two banks indirectly controlled by Russia were revoked and liquidated: the International Reserve Bank (100% owned by the Russian state-owned Sberbank) and Prominvestbank (99.77% owned by the WEB.RF state company). In addition, the NBU also banned Russian residents from participating in management of Ukrainian banks, and rejected refinancing loans to banks with Russian shareholders. At the outset of the invasion, Ukraine launched its contingency plan. First, there would be no restrictions on payment card transactions in retail stores, even during wartime; shops, pharmacies and gas stations were advised to prioritize non-cash payments. Ukraine has continuously communicated with market participants and retailers to emphasize the necessity of non-cash payments. Reducing the need for cash helps prevent panic. Ukraine therefore limited cash withdrawals to 100,000 hryvnia (approximately 3,000 euros), but imposed no restrictions on non-cash transactions. Upon the outbreak of war, Russia attempted to use missiles to attack critical infrastructure and plunge Ukraine into a total blackout. Therefore, Ukraine strengthened safeguards to ensure that banks could operate without interruption in the event of prolonged power outages. For example, the NBU’s “Power Banking” plan is a banking network spanning across Ukraine, including over 2,370 branches across about 390 cities and towns in all Ukrainian states. It can serve banking customers even during prolonged outages. The bank locations that make up the network have backup power and communications pipelines, enhanced cash collection capabilities, and additional staff. In addition, Ukraine also set up shelters where people can go to charge their phones and keep warm during outages. Hot food and ATM services are also provided. The NBU recognizes that payments are the lifeblood of the modern economy and must continue to function under all circumstances. Since the invasion, Ukraine has been doing its utmost to maintain stability. Measures have been taken to assist the highly digitized financial industry and ensure smooth operations even in the midst of war. The NBU resolution allowing banks to use cloud services located in countries such as the EU, UK, US, and Canada would allow banks to quickly restart operations and preserve all necessary data in case Ukraine’s physical infrastructure was destroyed. Later, these preparations were demonstrated to be effective in stabilizing morale and building strength to resist aggression, making a great contribution to the subsequent resistance. Taiwan can take many lessons from Ukraine’s pre-war preparations for financial resilience. The author is a Senior Research Fellow at TABF