BSP requires banks to cover liquidity needs for 1 year starting 2019

The Bangko Sentral ng Pilipinas is requiring universal and commercial banks to have funds ready to cover liquidity needs for a year.

The central bank’s policy-setting Monetary Board has approved the Net Stable Funding Ratio (NSFR) for universal and commercial banks to adopt starting next year.

“The NSFR is a measure of the ability of a bank to fund its liquidity needs over one year. It complements the Liquidity Coverage Ratio which covers a shorter period of over 30 days in which a bank shall hold sufficient high quality liquid assets that can be easily converted into cash to service their liquidity requirements,” the Bangko Sentral said in a statement.

Both ratios are aimed at strengthening the ability of banks to withstand liquidity stress and promote resilience of the banking sector.

The BSP is requiring only universal and commercial bank and select types of subsidiaries to comply with the LCR and NSFR standards, citing the importance of proportionality in its supervision approach

The smaller institutions like stand-alone thrift banks, rural banks, cooperative banks, and quasi-banks are subject to the Minimum Liquidity Ratio (MLR) requirement which supposedly better suit their simpler liquidity risk profile.

The NSFR provides an indicator on the availability of funding for an institution’s activities represented by its assets and off-balance sheet exposures. It provides a view of liquidity requirements over one year.

Supervisory enforcement

“Beginning 1 January 2019, the covered institutions shall maintain an NSFR of 100.0 percent on both solo and consolidated bases,” the central bank said.

The BSP is adopting an observation period of six months from July 1, 2018 to Dec. 31, 2018, to ensure a smooth transition to this new prudential standard and to allow prompt assessment and calibration of the components of the NSFR.

The covered institutions that will not meet the prescribed minimum ratio during the transition phase will be required to submit a funding plan or actions that will be taken to improve their funding profile and comply with 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 BSP noted.

The NSFR is part of the Basel III reform package issued by the Basel Committee on Banking Supervision.

Over the years, the BSP has introduced various liquidity reforms to improve the banking sector’s ability to absorb liquidity stress and lessen the risk of spillover from the financial sector to the real economy.

These reforms include the revised guidelines on liquidity risk management for banks and quasi-banks, followed by the introduction of the amended LCR framework and the MLR. —VDS, GMA News