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Garry Poluschkin, Robert Kirchner

The banking sector during the war: Is stability enough?

After more than 18 months into the war, Ukraine’s banking sector continues to demonstrate remarkable resilience and keeps functioning as the backbone of the real economy. No bank-runs have occurred, and access to cash was maintained even during electricity blackouts last winter. The capital adequacy ratio (CAR) is appropriately high, and the liquidity coverage ratio far exceeds required levels. In addition to crucial reforms since 2014, comprehensive measures by the National Bank of Ukraine (NBU) and a strong level of digitalization are key reasons for the observed stability.

  • Ukraine
NL 179 | September 2023
Financial Markets

However, a large liquidity buffer is not only a sign of resilience. It also reveals lack of lending. The bank loan portfolio declined by ca. 30% compared to pre-war levels in real terms. As lending to the private sector is an essential part of capital investment recovery, more reforms and measures are needed to prepare the sector for its key role in driving Ukraine’s economic reconstruction.

Reforms prepared the sector for the crisis

Ukraine’s banking sector had a rather low asset-to-GDP ratio of 40% in 2022. This ratio is similar to Romania, but much lower than that in Poland or Hungary. Besides, in Ukraine, the sector is characterized by a moderate level of concentration of the Top-5 banks – similar to the aforementioned countries – but a high level of state ownership, accounting for 50% of net assets similar to the share in 2021. These developments are the results of different past reforms since Russia’s aggression against Ukraine started in 2014. The NBU gradually has been incorporating the Association Agreement with the EU on financial sector regulation, conducting comprehensive asset quality reviews (AQR) and stress-tests, as well as increasing capital and liquidity requirement ratios. Many banks have been liquidated or nationalized, if these requirements were not met. As a result, the number of banks halved between 2015 and 2022, while CAR strongly increased, reaching 21% of risk-weighted assets in November 2021. As a result, the sector faced the consequences of Russia’s full-scale war well prepared.

Stable deposits reveal trust in the sector

Russia’s war has massive consequences for development. Nevertheless, no bank-runs occurred, and deposit growth, which was positive in nominal terms, has started growing even in real terms since February 2023. This development clearly shows reduced private consumption on the one hand. On the other hand, the increased demand for time deposits and inflows to bank accounts, which are to some extent based on salaries for military personnel, is a strong sign of trust in the sector.

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The ratio of non-performing loans (NPLs) to total loans had been on a declining path before the war but has been steadily growing since the start of the war, even though it remains short of the level seen in January 2021. This observation can thereby be partially associated with an easing of NPL regulation between February and June 2022, and postponed NPL reduction operations by banks. Therefore, the resumption of resilience assessments will be essential to uncover hidden risks. In addition, CAR has recovered and reached the level of November 2021 in March 2023 due to improved profitability. A further sign of resilience.

Crisis management and digitalisation

The NBU’s timely and comprehensive crisis management was the critical pillar of the stability of the sector. Its measures were decisive at the beginning of the war, as the financial stress level was higher than during the first war shock of 2014 or during the COVID pandemic.

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  • Emergency: At the beginning, the NBU introduced different measures to ensure access to liquidity, particularly launching unsecured refinancing loans to banks, while regulation changes and AQRs were postponed. Moreover, strict capital controls were introduced, the exchange rate fixed, and key policy rate decisions suspended.
  • Adjustment: A few months into the war, the NBU adjusted the exchange rate and hiked the key policy rate. At the same time, measures were implemented to maintain cash access at the time when Russia’s attacks caused electricity blackouts.
  • Recovery: Since beginning of 2023, the NBU has stopped funding the budget while banks are incentivised to play a larger role in state government bond purchases. Moreover, the NBU gradually liberalises capital controls since then and started a policy rate easing cycle due to declining inflation. Reserve requirements have been increased and a resilience assessment schedule has started.

Another reason for the unimpeded functioning of the sector is the strong digital transformation in the recent years accelerated during COVID.

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Contactless card and NFC payments rose at least fourfold between 2019 and 2022. Also, Apple Pay access is available in 75% of all commercial banks in June 2023 – more than in Poland or Hungary. According to international experience, digital transformation advances communication and increase access to bank services for customers. This is particularly vital during the war, as millions of Ukrainians are internally displaced and migrated abroad. The continuation of communication and services maintains thereby a key element of maintenance of trust in the sector and keeps the economy functioning.

The sector’s future role in Ukraine’s reconstruction

The NBU recently published a financial sector development strategy to prepare the sector for its future role for macroeconomic and financial stability as well as economic recovery. Improvements in corporate governance practise, adjustments of regulation to EU standards as well as comprehensive resilience assessments are set to be vital. Globally, banks usually play a powerful role in financing investments for economic growth. This is not the case in Ukraine yet.  Lending has fallen similar to GDP in real terms and the decline would have been even stronger without the state subsidy programme (1/3 of corporate lending in UAH are subsidised by the state).

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Banks charge risk premia and prefer low-risk assets like government bonds over than lending. As a result, the liquidity coverage ratio has grown strongly, exceeding the required norm by 330%.


Overall, a stable banking sector is a necessary, but not a sufficient condition to be able to take the key role in Ukraine’s reconstruction. More measures and international support are needed for the sector to reduce lending costs and boost lending volumes. For example, the enlargement of public guarantee schemes for private investment can be considered as an instrument to back up banks’ risks in financing private investment. Concrete steps in this regard would undoubtedly mark a milestone for the sector’s participation in Ukraine’s reconstruction.

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This newsletter is based on the Banking Sector Monitor Ukraine that has been analysed in cooperation with the Institute for Economic Research and Policy Consulting and the Centre for Economic Strategy.

Picture: ©Adobe Stock #40231193 von SergeyAK