BSP orders 100% liquidity buffer for banks

Local financial institutions hoping to lend out more money amid the central bank’s ongoing statutory reserve cuts may have to curb their enthusiasm after regulators announced a new requirement for banks to put up a 100-percent buffer to secure their short-term liabilities.

On Monday, the Bangko Sentral ng Pilipinas said its policy-making Monetary Board approved the adoption of the so-called Net Stable Funding Ratio (NSFR)—a measure of banks’ ability to fund its liquidity needs over a one-year period.

The NSFR policy, which will be imposed on universal and commercial banks, complements the Liquidity Coverage Ratio (LCR), which covers a shorter period of 30 days in which a bank shall hold sufficient High Quality Liquid Assets (HQLAs) that can be easily converted into cash to service its liquidity requirements.

“Both ratios are aimed at strengthening the ability of banks to withstand liquidity stress and promote resilience of the banking sector,” the BSP said in a statement, adding that financial institutions would be given until Jan. 1, 2019, to comply with the new rules, and those that fail to do so would be penalized.

The move to boost the banks’ liquidity buffers comes amid the central bank’s current policy of cutting the reserve requirement of local deposit-taking financial institutions, which —after two successive one-percentage point cuts over the last two quarters—is still one of the highest in the world at 18 percent of total deposits.

Recognizing the importance of proportionality in its supervision approach, the BSP requires only universal and commercial banks and select types of their subsidiaries to comply with the new liquidity requirements standards.

“The smaller institutions comprising of stand-alone thrift banks, rural banks, cooperative banks and quasi-banks are subject to the Minimum Liquidity Ratio (MLR) requirement, which better suits their simpler liquidity risk profile,” the central bank said.

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.

“Beginning Jan. 1, 2019, the covered institutions shall maintain an NSFR of 100 percent on both solo and consolidated bases,” the regulator said. “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.”