BSP prepares big banks for stiffer liquidity rules

THE Bangko Sentral ng Pilipinas (BSP) will closely monitor liquidity buffers held by big banks starting July, ahead of adopting tighter rules which ensure that lenders can stay afloat for at least a year.
The central bank said on Monday that the observation period for the Net Stable Funding Ratio (NSFR) will start July 1, months ahead of the 2019 target for its full adoption.
The NSFR will require universal and commercial banks to hold enough liquidity or “reliable” sources of funding to match their expected funding needs for one year. That will require big players to hold enough money supply to meet “expected and unexpected cash flows and collateral needs” during day-to-day operations.
The observation period will run from July to December to facilitate smooth transition and “allow prompt assessment and calibration” of the new requirement.
“During this period, the covered institutions that will not meet the prescribed minimum ratio are required to submit a funding plan or actions that will be taken to improve their funding profile and comply with the requirement,” the BSP said in a statement yesterday.
Starting 2019, banks found still unable to comply with the new requirement will face sanctions from the BSP depending on the “persistence and gravity” of the breach.
The central bank wants lenders to hold enough cash and liquid assets at all times as their inability to service withdrawals or process transactions could bear “unacceptable costs” and affect the financial footing of these firms. The latest move also bolsters safeguards against recurrence of a widespread financial crisis which is the main goal of the international Basel 3 framework.
The NSFR will be on top of the Liquidity Coverage Ratio, which requires big banks to hold high-quality, easily convertible assets to cover its projected net cash outflows over a 30-day period.
“Both ratios are aimed at strengthening the ability of banks to withstand liquidity stress and promote resilience of the banking sector,” the central bank explained. “The NSFR provides an indicator on the availability of funding for an institution’s activities represented by its assets and off-balance sheet exposures… Beginning 1 January 2019, the covered institutions shall maintain an NSFR of 100% on both solo and consolidated [including units] bases.”
Initial tests conducted by the BSP showed that big banks are “generally” able to comply with the new rule, BSP Governor Nestor A. Espenilla, Jr. had said.
Mr. Espenilla added that lenders should also be “responsible” as more funds circulate in the financial system amid increased bank lending from recent cuts in required bank reserves.
Money supply grew by 14.2% year-on-year to reach P10.9 trillion in April, according to the central bank. — Melissa Luz T. Lopez