THE BANGKO SENTRAL ng Pilipinas (BSP) has approved new guidelines that will require banks to hold ample liquidity buffers covering a whole year, in keeping with global standards for a solid asset base.
BSP Governor Nestor A. Espenilla, Jr. said the Monetary Board has approved guidelines to implement the Net Stable Funding Ratio (NSFR), which is one of the key reforms under the international Basel 3 framework.
“NSFR is basically a regulatory requirement for the banks to generally maintain a liquid position long enough to sustain it for a one-year period,” Mr. Espenilla told reporters.
The NSFR will require universal and commercial banks to maintain enough “reliable” sources of funding to match their expected needs for a full year.
These will serve as more dependable buffers that will enable banks to stay afloat even in times of funding crunch.
The new standard will be on top of the Liquidity Coverage Ratio (LCR), which requires big banks to hold high-quality, easily convertible assets to cover its projected net cash outflows over a 30-day period.
UNDER OBSERVATION
Once the circular is published, banks will undergo an “observation period” wherein their liquid assets will be monitored for the rest of the year.
By Jan. 1, 2019, the new standard will be implemented fully.
The BSP wants banks to remain liquid at all times, as their inability to service withdrawals or payment transactions could result in “unacceptable costs” that will compromise the financial footing of these lenders.
Tests BSP has conducted have shown that big banks are “generally” able to comply with the new rule, Mr. Espenilla said.
He added that the NSFR is designed to make banks even more responsible.
“[I]f we don’t have good rules that compel banks to behave prudently, if you release liquidity to them, the danger is it will result in excesses in terms of credit which then creates problems down the road,” the central bank chief said.
“But in a situation wherein you have a strong regulatory framework, the BSP is confident that the channels to which the liquidity passes through — banks — are going to be responsible.”
Mr. Espenilla made these remarks in light of at least P90 billion in funds expected to be freed up by the additional one percentage point reduction in bank reserves that takes effect Friday.
OTHER SAFEGUARDS IN PLACE
Apart from the NSFR and the LCR, the central bank has also rolled out the minimum liquidity ratio which covers thrift, rural and cooperative banks.
BSP Deputy Governor Chuchi G. Fonacier said in a separate interview that a regulation requiring intraday liquidity reports is also in the works. The new rule will ensure that financial firms hold enough money to meet “expected and unexpected cash flows and collateral needs” from day to day.
The BSP has been fortifying regulatory standards under the Basel 3 regime since 2014 that include the 10% capital adequacy ratio, a framework for domestic systemically important banks and the five percent leverage ratio.
These measures have been crafted by international policy makers to improve risk management and prevent a recurrence of the 2008 Global Financial Crisis. Excessive lending that time led to massive credit defaults, in turn causing the collapse of big banks and triggering a global recession. — Melissa Luz T. Lopez

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