The impact of the banking system liquidity on the volume of lending and investment in government securities during the war

Abstract

In the context of escalating military and political uncertainties, a crucial component of banking system stability is the establishment of an adequate level of resource provision – liquidity. The research aims to analyze the transmission impact of the banking system's liquidity and its structure on the volumes of financing for the real sector of the economy in the second year of the war in Ukraine. In the conditions of war and the corresponding intensification of military-political threats and uncertainties, the regulator has made numerous complex decisions and restrictions aimed at balancing the challenges with the current situation in financial markets. The research found that the banking sector of Ukraine currently accumulates a significant amount of excess liquidity and demonstrates high profitability. However, in the conditions of war, the transmission mechanism works improperly, requiring constant intervention from the regulator to balance the liquidity of the banking sector and state finances, which, in turn, affects the behavior of commercial banks and changes the structure of their asset portfolios. An analysis of the structure of active operations portfolios of the banking, corporate, and private sectors provide grounds to assert that there is no reason to expect a change in investment behavior from these groups in the perspective of the next year due to the specificity of the conditions imposed by the Ministry of Finance and the regulator. To maintain macroeconomic stability in the national economy in the conditions of martial law it is necessary to introduce conditions to reduce demand for foreign currency and, as an alternative, offer the preservation of savings solvency through simplifying access to investments in government securities for households. The low financial literacy of the population and the underdeveloped stock market in Ukraine, as well as the more complex mechanism of purchasing government bonds or military bonds compared to deposit services, make such investments by the population insignificant and limited in demand.