Provision of Consultancy Services to Support the Alignment of Ukraine’s Regulatory Framework and Supervisory Practices with EU Prudential Standards in the Banking Sector

Opportunity Background

Background

In the aftermath of the financial crisis, the EU introduced a number of regulatory changes aimed at reducing the underlying risks in the EU banking sector. These reforms affect EU banking groups’ activities in the EBRD Region that are not EU Member States, as EU bank prudential regulation is applicable at the highest level of consolidation. The impact of EU regulatory changes on Western Balkan countries and the alignment of their bank regulatory frameworks towards EU prudential standards have been the focus of a dedicated work stream under the Vienna Initiative (VI) platform, in which the EBRD plays an active role. Ukraine became a member of the VI in June 2020 and the National Bank of Ukraine (‘NBU’ or the Client’) attended the dedicated VI workshop on equivalence in July signalling its interest to participate in regional cooperation in this area.

Under the auspices of the VI, the Bank was approached by national authorities which expressed concerns about the adverse impact of certain aspects of the EU Capital Requirement Regulation (CRR) on their financial systems as a result of diverging treatment of sovereign exposures on the balance sheets of EU banking groups and their subsidiary banks. Article 114 of the CRR stipulates that in EU countries, local currency exposures to sovereign bonds and mandatory reserve requirements held at central banks receive risk weights of 0%, whereas local-currency exposures to non-EU sovereigns held by subsidiaries of EU banks are assigned positive risk weights when consolidated at group level.

Consequently, upon consolidation, risk weights can reach up to 150%2 vs. a domestically applied risk weight of 0%.

There are several adverse effects of Article 114 of the CRR on the financial systems and local capital markets of non-EU EBRD COOs with systemic presence of EU banks. The challenges include constraints in the conduct of monetary and fiscal policies, and adverse effects on local FX, bond and money markets, as well as on capitalisation and profitability of subsidiaries of EU banks operating in the region. The latter could ultimately have an effect, albeit not necessarily crucial, on the strategic decision of EU banks to continue operating in these countries. In addition, the current regulatory treatment limits the scope of activity of these banks in domestic securities markets, both as investors and market-makers. However, Article 114 allows sovereign and central bank exposures in domestic currency held by EU banks’ subsidiaries in non-EU countries to retain zero risk weights if the European Commission (EC) adopts an equivalence decision, attesting that local supervisory and regulatory arrangements are at least equivalent to those applied in the EU (equivalence status).

The equivalence assessment (EA) in the financial services area is performed by the EC typically based on technical advice from the European Banking Authority (EBA), related activities or reports of international organisations or input of other public bodies or stakeholder organisations. The main goal of equivalence is to manage effectively and facilitate cross-border activity of financial market players between the EU markets and third countries in a sound prudential environment, as third countries adhere to and adopt the same high standards of prudential rules that are in force within the EU. Accordingly, the recognition of equivalence can provide mutual benefits for both the EU and third country financial markets and institutions. Third countries may express an interest in being assessed, however, the decision is a unilateral and discretionary act of the EC, both for its adoption and any possible amendment or repeal. The assessments involve an intensive dialogue with the competent authorities of the third country whose framework (legislation and regulation in force at the time) is being assessed against that of the EU. They provide the necessary technical grounds on which the EC may pursue its decision-making on equivalence (which typically takes the form of an implementing act). The assessment is structured in eight topics covering several sections which are assessed using a qualitative approach with a five-grade scoring scale (super-equivalent, equivalent, largely equivalent, partially equivalent, and non-equivalent). The eight topics include (i) supervisory framework, (ii) own funds, (iii) credit risk requirements, (iv) market risk, (v) operational risk, (vi) liquidity, (vii) capital buffers and macro prudential tools, and (viii) other regulatory requirements. At country level a two-grade scoring scale is used (equivalent, non-equivalent) aggregating the section and topic scores. Equivalence should not be understood as a perfect alignment to EU law but rather as equivalence of outcomes.

Certain areas will allow for some leeway, hence equivalence is different from the EU accession process itself.

Under its Association Agreement with the European Union that entered into force on 1 September 2017, Ukraine committed to implement reforms to align its financial sector policies and legislation to those of the EU. Accordingly, the country continues to approximate its bank regulatory framework and supervisory practices with those of the EU, benchmarking against the set of international standards and recommendations from the EBA and the Basel Committee on Banking Supervision (BCBS). Recently introduced and forthcoming regulations include the implementation of the liquidity coverage ratio in force since December 2018, the net stable funding ratio due to be introduced in January 2021, and capital requirements for operational and market risk expected to become applicable from January 2022.

Against this background, Ukraine remains strongly committed to achieving positive equivalence status under Article 114 of the CRR and is engaging with the EBRD under the Vienna Initiative, notably during workshops on the topic of equivalence. To support preparations for the EBA assessment at a future date, the NBU completed a self-assessment of its bank prudential regulation and supervision frameworks in 2017 against BCBS standards and adopted an action plan to address identified gaps which it has been gradually implementing since then. The formal equivalence assessment process for Ukraine is yet to commence and will involve the completion of questionnaires, on-site due diligence and close engagement with the EBA. Any material gaps in the local regulatory framework as compared to the EU’s identified during this assessment will need to be addressed before a positive opinion can be passed onto the EC for consideration.

To support Ukraine’s equivalence assessment process, the NBU has requested the EBRD to provide technical assistance (TA) in order to conduct a peer review of its self-assessment and prepare any necessary updates thereof, provide support to enhance the NBU’s supervisory practices and identify any gaps requiring new regulations or reforms, aiming to approximate further Ukraine’s bank regulatory and supervisory framework to the EU’s. The services of qualified individual(s) or firm(s) (the Consultant are being sought to provide the required assistance under the leadership and coordination of EBRD. The project follows previous EBRD-supported TA projects to the NBU on monetary policy implementation in the context of its inflation targeting framework (2018-2019) and foreign reserve management (2019), which were completed successfully, and on a model-aided framework for banking and capital market stability assessment to support the macro-prudential policy function at the NBU (ongoing). This project also builds on broader collaboration with IFIs, including the World Bank, through which the NBU has continued to strengthen its regulatory framework and supervisory processes for the banking sector.

Opportunity Structure

Objective

The objective of this project is to support the National Bank of Ukraine in its efforts to bring their regulatory and supervisory frameworks applicable to credit institutions to an equivalent status with EU standards by addressing the remaining disparities/identified gaps through technical assistance. The project is expected to maximise the country’s readiness for qualifying and obtaining positive EA by the EC for the application of Art 114 of the CRR. Such decision by the EC would ultimately help EU banks’ subsidiaries in Ukraine to benefit from favourable treatment in terms of the capital requirements for sovereign and central bank exposures denominated in local currency.

This work has become even more pertinent in the current environment as a response to the COVID-19 crisis to support local banks with increasing their private sector lending capacities (with a main focus on SMEs). This is particularly important, as there is a growing importance of local banks serving as conduits for private sector investment, in light of limited fiscal space for countries outside the EU to respond to the pandemic.

Scope of Work

The support provided to the NBU will consist of providing expertise in all or a subset of eight focus areas of the Equivalence Assessment (supervisory framework, own funds, credit risk requirements, market risk, operational risk, liquidity, capital buffers and macro prudential tools and other regulatory requirements) in order to advance the country’ implementation of Basel III standards, as implemented in the EU through the Capital Requirements Regulation and Directive, based on which the EU equivalence assessments are conducted. In particular, the NBU wishes to receive support with aligning its supervisory framework with regulatory requirements, supervisory guidance and best practices applied in the EU, and with the introduction of targeted regulatory provisions in areas where significant regulatory gaps may be identified or which remain fully unregulated. Accordingly, the support may focus on the regulatory treatment of securitisations.

To achieve the above objectives, the Consultant will undertake the following tasks:

1. Self-assessment and due diligence support:

• Verification on the self-assessment already conducted by the NBU in line with the EBA methodology (standard questionnaires) and additional due diligence including to update relevant areas of the self-assessment (peer review);
• Provide assistance to the NBU with completing EBA questionnaires and during EBA onsite due diligence visits which form part of the formal assessment process;

2. Legal, supervisory and regulatory advisory support:

• Address identified gaps relative to the EU prudential framework for banks, which can include assistance in developing and drafting new regulations (where necessary) and changes and/or supplements to the existing bank supervisory and regulatory framework in Ukraine.
• Provide assistance with aligning Ukraine’s supervisory framework for credit institutions with EU best practices, including the key elements of the Supervisory Review and Evaluation Process (SREP).

Deliverables and reporting

The Consultant shall deliver all tasks set out in Section III Scope of Services of the Terms of Reference.

The following deliverables and timeline have been identified for the fulfilment of the project:

• Peer review of NBU self-assessment, and any necessary updates thereto following additional due diligence
• Draft targeted regulatory provisions on the regulatory treatment of securitisations
• Possible additional revisions to existing regulations, subject to the outcome of the peer review and the gaps identified therein
• Provide assistance with aligning Ukraine’s supervisory framework for credit institutions, including the key elements of the SREP, with EU best practices
• Undertake due diligence and support the NBU with completion of EBA equivalence questionnaires and during on-site visits as part of the formal EA process

All deliverables shall be prepared in electronic format and must be satisfactory to both the NBU and EBRD. The above timeline can be amended by agreement of the Consultant, the NBU and EBRD.

Reporting will be on a regular basis to EBRD and NBU and will consist of the following:

• Work plan within 2 weeks from the start of the project, the Consultant will provide a draft work plan for implementation, including tasks and time allocations, benchmarks and intermediate deliverables, for approval by the EBRD and NBU;
• A project progress report (approximately 1-2 pages) to be submitted no later than 9 months after the launch and to include: (i) an update on the state of the implementation of the project, (ii) description of issues/problems that have arisen (if any), (iii) a detailed action plan for the following period, (iv) any other points the Consultant would like to bring to the attention of EBRD and NBU.
• A final report to be submitted within a month after the end of the project, inclusive of all relevant documents prepared (including draft legislation), providing a comprehensive summary of the work undertaken, results and conclusions. The report should also include a description of any issues that have arisen that require resolution and any other points the Consultant would like to bring to the attention of EBRD and NBU.

Documents produced by the Consultant shall be provided in English, save for any draft regulations which shall be provided in both English and Ukrainian. All reports will be submitted in electronic versions in standard formats (MS Word, Excel, etc.) without copy/print protection.

The Consultant shall preserve the confidentiality of any document, information or other material directly related to the implementation of the project that is communicated as confidential, during the implementation period and for five years after the end of the implementation period. The Consultant shall also ensure appropriate protection of personal data. Personal data means any information relating to an identified or identifiable natural person. Any operation involving the processing of personal data, such as collection, recording, organisation, storage, adaptation or alteration, retrieval, consultation, use, disclosure, erasure or destruction, shall be done in accordance with the confidentiality clause and shall only be done as far as necessary for the purpose of the project.

Competitive Scope

Qualifications

The Consultant will need to demonstrate (i) strong expertise in bank prudential regulation and supervision from both EU and non-EU markets, and (ii) expertise in central banking. The Consultant will form a project team of experts to carry out the project. The provided expertise should cover all areas as defined in the scope of work. The Consultant may associate to enhance their qualifications.

It is expected that the Consultant’s team will consist of the following key experts:

(i) Project Manager/Team Leader

• Preferably at least 10 years of professional experience in prudential regulation and supervision of credit institutions from both EU and non-EU countries;
• Excellent knowledge of the EU regulatory and supervisory framework for credit institutions, as well as international standards and best practices in bank prudential regulation and supervision;
• Prior experience with advising on and/or designing central bank regulations and supervisory frameworks for credit institutions is required;
• Knowledge of the EU equivalence assessment process in the banking sector would be an advantage;
• Prior experience with similar assignments, including from EBRD countries of operations, is a plus;
• Proficiency in written and spoken English language;
• Master’s degree in economics and/or finance.

(ii) Team of regulatory and supervisory experts

• Preferably at least 5 years of consultancy experience;
• Proven knowledge of the EU’s framework for prudential regulation and supervision of credit institutions;
• Experience in advising central banks with developing bank prudential frameworks and drafting regulations;
• Excellent communication, analytical, drafting and presentation skills;
• Proficiency in written and spoken English language;
• Familiarity with the Ukrainian bank prudential framework would be an advantage.

Submission of Offers

Responses must be sent through the EBRD Tender Portal before the indicated deadline.

Closing Date: 02/08/2021 11:00 AM