Bangko Sentral adopts Basel III liquidity rule

Universal and commercial banks must be able to address financial stress by keeping high quality assets that can be easily converted into cash, the Bangko Sentral ng Pilipinas said on Tuesday.

This means that banks must be liquid enough to fend off periods of financial stress up to 30 days.

The central bank said its policy-setting Monetary Board has approved the Liquidity Coverage Ratio framework to strengthen the financial position of universal and commercial banks as part of the Basel III reform package issued by the Basel Committee on Banking Supervision.

The Basel III framework was adopted by global banking authorities in the aftermath of the sub-prime lending crisis that led to the 2007 economic depression across the globe.

Under the new rule, universal and commercial banks including foreign bank branches must hold sufficiently High Quality Liquid Assets which could be converted into cash to service liquidity requirements during a 30-day stress period.

"This provides banks with a minimum liquidity buffer to be able to take corrective action to address a liquidity stress event," the BSP said in an emailed statement.

The Liquidity Coverage Ratio imposes a minimum standard to protect banks against financial risks that may happen even if a bank is still solvent, the central bank noted.

The new liquidity rule will be observed and monitored by the central bank from July 1, 2016 to end-2017, during which banks will report their Liquidity Coverage Ratio to the BSP.

By January 1, 2018, banks must meet a 90 percent threshold in terms of the Liquidity Coverage Ratio. It will then be increased to 100 percent by January 1, 2019.

"Based on industry simulations, the BSP believes that universal and commercial banks will readily comply with the new standard," the central bank said.

The Liquidity Coverage Ratio promotes discipline in mitigating liquidity risks. "This is consistent with the broad efforts to boost financial stability, which is a key policy objective of the BSP," the central bank emphasized.

Aside from the liquidity ratio, the Monetary Board is looking at the Net Stable Funding Ratio which may be drafted this year.

The funding ratio looks at the liquidity requirements of bonds over a longer period of one year, the central bank said. – Jon Viktor Cabuenas/VDS, GMA News