Smaller lenders seen equipped to meet new liquidity standards

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By Melissa Luz T. Lopez,
Senior Reporter

SMALLER BANKS are well-equipped to meet new liquidity standards the central bank is looking to impose on them, parallel to a risk management tool which currently covers big lenders, a senior official said.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said thrift, rural, and cooperative banks can easily comply with the minimum liquidity ratio (MLR), which will require lenders to have high-quality liquid capital equal to 20% of its total liabilities at any given time.

The MLR will cover smaller banks as well as quasi-banks (QBs) like investment houses which are not covered by liquidity standards under the international Basel 3 regime.

The draft rules define the MLR as the share of a firm’s stock of liquid assets against total liabilities. 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, subject to a 50% haircut.

“Based on a more recent simulation involving 531 banks and QBs using data as of end-March 2017, MLR-covered institutions generally meet the 20% requirement with average ratio of 74.9% for thrift banks and 68% for rural and cooperative banks,” Mr. Espenilla said in an e-mail interview with BusinessWorld.

“Only a few banks will need the observation period to adjust to the quantitative requirement.”

All firms must also submit a monthly report on its MLR compliance, according to the draft regulation. To add, the banks should also monitor the share of liquid assets in terms for both the peso and foreign currency deposit units where there is “significant activity.”

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

The central bank wants all banks to remain liquid at all times, as their inability to service withdrawals or payment transactions could bear “unacceptable costs” and affect their financial footing. The BSP also wants to put in place a scheme to report intraday liquidity levels.

For the MLR, Mr. Espenilla said the regulator is looking to introduce a one-year trial period before the rule becomes binding by Jan. 1, 2019.

“During the observation period, the concerned banks/QBs should assess their compliance with the minimum requirement.”

Those which cannot comply with the standard for two consecutive weeks need to prepare a liquidity buildup plan that will “clearly articulate” strategies for the firm to meet the MLR. A shortfall in the amount of liquid assets will merit heightened supervision from the central bank, while a failure to meet the standard for a “prolonged” period would entail remedial action and possible sanctions on the entity and its officials.

These liquidity management measures form part of the Basel 3 regime crafted by international policy makers to improve risk management and prevent a repeat of the 2008 Global Financial Crisis. Excessive lending led to massive credit defaults, which triggered the collapse of big banks and caused widespread recession worldwide.

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