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Big banks hard-pressed to comply with new liquidity rule — BMI

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BIG BANKS will have to boost deposit taking and may cut back on long-term loans to comply with a new liquidity measure imposed by the central bank, analysts at BMI Research said.

In a report released over the weekend, the Fitch unit said the Net Stable Funding Ratio (NSFR) which took effect this month would put some pressure on funding costs incurred by lenders.

The NSFR requires universal and commercial banks to hold enough “reliable” sources of funding to cover their “expected and unexpected cash flows and collateral needs” during day-to-day operations projected over a one-year period.

“In general, we believe that banks will likely be forced to cut back on short-term wholesale funding and raise deposit rates to attract more retail deposits, which could see funding costs increase over the coming quarter,” BMI said in its report.

The research firm said the new requirement is “positive for financial stability over the long-run,” but banks are likely to bear bigger costs as they make the transition in securing more permanent, reliable funding.

“The rationale is to limit structural maturity mismatches and to reform the asset and liability structures of banks to make them less prone to cyclical factors,” BMI said.

“Nevertheless, we expect Philippines banks to feel some pinch in the short term in the form of higher transition and funding costs as they adjust their balance sheets in order to comply with the new standard.”

The Bangko Sentral ng Pilipinas (BSP) has set July-December as the observation period to facilitate smooth transition and “allow prompt assessment and calibration” of the new prudential tool.

Banks that fall short of the standard must come up with funding plans or remedies to boost their pool of liquid assets.

By Jan. 1 next year banks unable to meet full coverage will face sanctions from the BSP.

Test runs conducted by the regulator showed that big banks are generally able to comply with the new rule, BSP Governor Nestor A. Espenilla, Jr. previously said.

BMI said banks will likely issue debt papers beyond a one-year maturity in order to meet the NSFR, which in turn could push market yields up.

Banks could also turn away from long-term loans which would require them to hold more buffers for an extended period.

“This may see banks cut back on long-term lending, undermining banks’ traditional role in liquidity and maturity transformation in the economy,” the research outfit said.

“This poses downside risks to economic growth in the Philippines given that the country has an underdeveloped capital markets and businesses rely more on banks for long-term financing.”

The NSFR augments the Liquidity Coverage Ratio, which requires big banks to hold high-quality, easily convertible assets to cover projected net cash outflows over a 30-day period. These form part of the tighter regulatory standards under the Basel 3 regime which seek to improve risk management and prevent a repeat of the 2008 Global Financial Crisis.

Moody’s Investors Service has said that the new tool will be “credit positive” for banks, as it will ensure resilience despite periods of financial stress. — Melissa Luz T. Lopez