On the 24th of February, Russian troops started an invasion of Ukraine. This war initiated by Russia has resulted in stronger NATO unity and a globally coordinated policy response among Western countries, including the largest package of sanctions adopted in history.
War in Ukraine: impacts on the banking sector
Management Solutions’ analysis is threefold, focusing on the Response from regulators, the Response from supervisors and the Response from banks:
- With regard to the response from regulators, no specific regulation is being issued as of yet. The European Parliament and the European agencies (EBA, ESMA, EIOPA) are issuing messages and warnings for firms to comply with the sanctions, to facilitate access to the financial sector for refugees, and to prevent disinformation campaigns and cyber-attacks.
- As for the response from supervisors, the ECB actually approached banks under its supervision before the outbreak of the war to analyze their exposure to Russia. Later, the ECB and the NCAs requested further information on exposures, NPLs, provisions, SWIFT transactions, indirect exposures and frozen accounts, among other issues. And the Polish supervisor, KNF, has been particularly proactive.
- Regarding the response from banks, it should be noted that, since the annexation of Crimea in 2013-14, European banks have been decreasing their exposure to Russia, which is now below 0.7% of their total exposure. However, a few major banks still had relevant exposures in Russia at the beginning of the war.
Reactions from banks come from different angles:
- Regarding governance, most banks are holding daily crisis committees at the highest level, and especially affected banks have dedicated war rooms and crisis support teams.
- As for reporting, banks are rapidly answering requests by the ECB and the national competent authorities, and are producing internal reports to Senior Management.
- Concerning the identification of exposures, banks are reviewing them thoroughly across portfolios – not only direct exposures, but also indirect and contingent exposures, connected clients, collaterals, deposits, etc.
- Regarding risk appetite and limits, banks with significant exposure to Ukraine, Russia and Belarus are actively working on the limits, thresholds and actions to be taken. Also, most banks are downgrading the Russian Federation’s credit ratings to pre-default levels.
- As for credit risk measurement, specific stress testing scenarios are being produced, such as impacts on GDP due to gas supplies dropping, nationalization of Russian subsidiaries, further sanctions, etc. Preliminary impacts on P&L, capital and provisions are being calculated; and specifically in provisions, banks are considering moving exposures to stage 3, and overlays and overrides are likely to be applied.
- In the market and ALM domain, no overshooting has been observed so far. In liquidity, requests are expected from the supervisors on daily maturity ladders to see the evolution of deposits.
- Regarding compliance, banks are reviewing blacklists on a daily basis, and the KYC and transaction monitoring procedures have been intensified, with stricter rules and dedicated teams or task forces.
- In the IT Risk arena, banks in Europe are now under maximum alert, as cyberattacks from Russia have more than doubled since the war outbreak; and a full review of third-party providers is being conducted in most banks.
As it is apparent, banks are very actively working on the impacts of the war in Ukraine, and Management Solutions is already accompanying them in these trying times. The most affected areas (Risk, Finance, IT, Business, Compliance, etc.) are precisely those where Management Solutions’ core expertise is.
Therefore, drawing on our understanding of the requirements and our deep knowledge of regulation and supervision, we cover all stages necessary to support our clients in deploying a solid response to this crisis.