New liquidity rule to strengthen banks
Monetary authorities have approved a new liquidity requirement aimed at bolstering a bank’s ability to withstand financial shocks, the Bangko Sentral ng Pilipinas (BSP) announced on Monday.
Universal and commercial banks (UK/Bs), along with select subsidiaries, will have to comply with the Basel III requirement known as the net stable funding ratio (NSFR), adopted by the BSP’s policymaking Monetary Board as part of ongoing efforts to strengthen the domestic banking industry.
“Beginning 1 January 2019, the covered institutions shall maintain an NSFR of 100.0 percent (100.0%) on both solo and consolidated bases,” the Bangko Sentral said in a statement.
“To ensure a smooth transition to this new prudential standard and to allow prompt assessment and calibration of the components of the NSFR, the BSP is adopting an observation period of six months from 1 July 2018 to 31 December 2018,” it added.
The NSFR, a measure of a bank’s ability to fund liquidity needs over a year, is part of the Basel III reform package drawn up by international regulators response to the 2007-2008 global financial crisis.
Over the next six months, covered institutions unable to meet the prescribed minimum will be required to submit a funding plan or detail actions that will improve their funding profiles and help them achieve the requirement.
“Once the minimum ratio is implemented in 2019, breaches in the ratio will be dealt with using the tools in the BSP’s menu of supervisory enforcement framework taking into account the persistence and gravity of the breach,” the central bank said.
The NSFR will complement another Basel III reform, the liquidity coverage ratio or LCR that was adopted by the Monetary Board in 2016.
The LCR, which covers U/KBs and foreign bank branches, mandates these institutions to maintain high quality liquid assets (HQLAs) that can be easily converted into cash to service liquidity requirements over a 30-day period.
“Recognizing the importance of proportionality in its supervision approach, the BSP requires only U/KBs and select types of U/KB subsidiaries to comply with the LCR and NSFR standards,” the central bank said.
“The smaller institutions comprising of stand-alone thrift banks, rural banks, cooperative banks, and quasi-banks (QBs) are subject to the minimum liquidity ratio (MLR) requirement, which better suits their simpler liquidity risk profile,” it added.
The Bangko Sentral has been introducing liquidity reforms over the past few years to improve the banking sector’s ability to absorb liquidity stress and lessen spillover risks to the wider economy.
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