THE CENTRAL BANK will impose tighter liquidity management rules on banks to include monitoring of foreign currency exposure and cash positions across intraday and intragroup transactions.

In a statement, the Monetary Board said revisions of existing liquidity management guidelines will kick in by September 2018, following the approval of the new rules in its Oct. 12 meeting.

These standards amend existing guidelines issued back in 2006, with the Bangko Sentral ng Pilipinas (BSP) citing the need to upgrade standards to ensure “smooth” operations among banks and quasi-banks in both normal times and periods of stress.

“Banks are exposed to liquidity risk as they take advantage of opportunities to expand lending activities, enter new markets, engage in and offer innovative products and grow their off-balance sheet transactions,” the BSP said.

“They must also manage liquidity amid intense competition for retail and wholesale funds.”

As a precaution, banks need to keep funding positions in check to make sure that they can pay obligations “without incurring unacceptable costs” or depleting their cash holdings that could affect day-to-day operations.

The central bank gives room for varied approaches between “simple” and “complex” banks, with the former allowed to use static cash flow projections to monitor liquidity requirements.

Complex banks, however, are expected to adopt additional strategies to project their cash requirements.

Offhand, complex financial firms must put in place measures on:

• foreign currency management by identifying positions in “significant” currencies;

• intraday liquidity management by anticipating the timing of inflows and outflows;

• intragroup liquidity management for banks that belong to a financial group in order to control exposures and protect the financial entity from potential spillovers from issues faced by another entity within the group;

• collateral management by tapping the repurchase markets to get hold of short-term cash;

• as well as stress-testing and contingency funding protocols.

Monitoring banks’ liquidity positions must also be a board-level concern, with the BSP requiring senior management to develop funding strategies which “ensure the availability of stable funding sources,” diversification of maturities and preservation of alternative funding sources.

The board of directors is also expected to “clearly define” the level of a bank’s liquidity risk tolerance and communicate this limit to its officials and employees, the BSP said.

The BSP has rolled out the liquidity coverage ratio (LCR) standard which requires big banks operating in the Philippines to hold high-quality, easily convertible assets to cover total net cash outflows for any 30-day period.

Such buffers will allow lenders to stay afloat even during a funding crunch.

Next year, banks are supposed to hold liquid assets that will cover 90% of their monthly cash outflows, and 100% by 2019.

The LCR is part of an array of reforms under the Basel 3 regulatory framework, which was crafted by international policy makers to help improve risk management and prevent a recurrence of the 2008 Global Financial Crisis, which was triggered by massive credit defaults that led to the collapse of big banks and caused widespread recession.

The central bank is likewise working on additional measures in an effort to help address liquidity risks, which include imposing a minimum liquidity ratio for thrift, rural, and cooperative banks; changes to the LCR standard for big banks; implementation of the net stable funding ratio standard; and the required reporting of intraday liquidity positions. — Melissa Luz T. Lopez