BSP sets minimum liquidity ratio for small lenders

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BSP-Bangko Sentral ng Pilipinas

By Melissa Luz T. Lopez, Senior Reporter

THE CENTRAL BANK will impose liquidity standards on small banks by 2019, parallel to a measure imposed on bigger lenders in order to manage financial risks and maintain a sound banking system.

In a statement on Friday, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) announced the approval of the minimum liquidity ratio (MLR) which will cover thrift, rural, cooperative, and quasi-banks.

The new standard will require these lenders to keep liquid assets that can cover at least 20% of its total liabilities at any given time. Considered as eligible liquid assets are a bank’s cash on hand, other cash items, claims from the BSP, debt securities tagged with a zero risk weight, and deposits in other banks.

The new rule is designed to enhance the “resilience” of these supervised entities to episodes of a potential funding crunch without suffering losses or causing a widespread collapse across the banking industry.

The MLR is the equivalent of the liquidity coverage ratio (LCR) imposed on universal and commercial banks, which requires them to hold high-quality and easily convertible assets to cover expected net cash outflows for a 30-day period. Big banks must hold assets that can cover 90% of their monthly cash outflows this year, which will go up to 100% by 2019.

The BSP will use two approaches in determining the liquidity tool for a bank: small lenders which are subsidiaries of a universal or commercial bank will be covered by the LCR, while other stand-alone players will be covered by the MLR.

BSP Governor Nestor A. Espenilla, Jr. previously said that 531 banks and quasi-banks can comfortably meet the 20% liquidity standard. In particular, thrift banks posted an average ratio of 74.9%, while rural and cooperative banks clocked in at 68% as of March 2017.

The small players need to monitor their liquidity positions this year running up to the implementation of the 20% standard by Jan. 1, 2019.

“Once the minimum requirements are implemented in 2019, the BSP will address breaches in accordance with the persistence and gravity of the breach. Supervisory actions may therefore range from heightened monitoring, to requiring remedial measures, and finally, imposing sanctions,” read the BSP statement released Friday.

The MLR and LCR form part of the central bank’s moves to align local regulations with international standards under the Basel 3 framework, which prescribes supervisory tools to improve risk management and prevent a repeat of the 2008 Global Financial Crisis.