MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is requiring banks to hold enough liquidity or stable sources of funding for a one-year period starting next year to provide a ready buffer and at the same time further strengthen the industry.
BSP Governor Nestor Espenilla Jr. said the central bank has approved the guidelines on the net stable funding ratio.
“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,” Espenilla said.
He said the NSFR is patterned after the liquidity coverage ratio (LCR) through a phased in period, wherein banks would be given until the end of the year for the observation period before full adoption by January next year.
“What will happen is there is an observation period for the rest of the year and it will formally kick in Jan. 1 next year,” Espenilla said.
The latest reform, the BSP chief said, would complement the LCR framework introduced in 2016 that requires universal and commercial banks, as well as foreign bank branches to hold sufficient high quality liquid assets (HQLAs) easily convertible to cash to service liquidity requirements over a 30-day stress period.
This would provide banks with a minimum liquidity buffer to be able to take corrective action to address a liquidity stress event. Banks were required to meet the 100 percent LCR threshold in January.
Both the NSFR and LCR are part of the Basel 3 reform package issued by the Basel Committee on Banking Supervision (BCBS).
“The tools of the BSP are multiple. We are not just moving monetary policy, we are also at the same time complementing what we do with the regulatory policy,” Espenilla said.
The decision of the BSP to further slash the level of deposits banks are required to keep with the central bank to 18 percent is expected to release around P100 billion in additional liquidity into the financial system.
“If 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,” Espenilla said.
Under a strong regulatory framework, the BSP chief is confident the channels to which the liquidity passes through banks are going to be responsible.
“We do reforms not during a crisis, we do it when people are ready so that we avoid crisis down the road. I think that is also one of the reasons why the economy is doing well because during good times we keep pushing these reforms so that we don’t have to do these emergency actions during crisis,” he said.
The regulator is issuing a four-phased regulatory reform to reinforce the capability of banks in managing liquidity risk.
It has approved last month the guidelines on the LCR, the complementary Minimum Liquidity Ratio (MLR) for thrift and rural banks as well as the NSFR. The fourth phase is the guidelines on the intraday liquidity reporting.
Assets of Philippine banks stood at P15.71 trillion in end-March, 11.3 percent higher than the P14.12 trillion recorded in end-March last year.