Tighter liquidity requirement credit positive for banks, says Moody’s

MANILA, Philippines — Moody’s Investors Service said the decision of the Bangko Sentral ng Pilipinas (BSP) to require big banks to hold enough liquidity or stable sources of funding for a one-year period is credit positive.

Simon Chen, senior analyst at Moody’s, said Philippine banks would benefit from adoption of net stable funding ratio (NSFR) through a stronger funding resilience.

“The banks’ adherence to NSFR rules will limit their reliance on less stable funding sources, reducing their sensitivity to tightening market liquidity in times of stress,” Chen said.

Under the NSFR, universal and commercial banks are required to put up a 100 percent buffer enough for one year. The adoption of the NSFR would also be 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.

The LCR framework introduced in 2016 required big banks as well as foreign bank branches to hold sufficient high quality liquid assets (HQLA) which can be easily converted into 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.

“The new NSFR rule will complement LCR requirements and strengthen Philippine banks’ funding resilience. The new rules are a key part of the Basel III regulatory framework and require banks to maintain more stable sources of funding for their on- and off-balance-sheet activities,” he said.

Chen said the NSFR standard seeks to limit excessive reliance on short-term funding by obliging banks to maintain a minimum level of long-term resources against all bank activities.

“The NSFR’s objective is to promote bank liquidity,” the analyst said.

The debt watcher said 10 rated Philippine banks – BDO, Ayala-led Bank of the Philippine Islands, China Bank, state-run Land Bank of the Philippines, Metropolitan Bank & Trust Co., Philippine National Bank, Security Bank, Rizal Commercial Banking Corp., Union Bank, and UCPB – are expected to comply with the requirement without challenges.

“These banks currently have strong capital profiles and large bases of current and savings account deposits, which are among the most favorable funding sources under NSFR rules, and low reliance on short-term confidence-sensitive wholesale funding,” Chen said.

He said the new rule would raise the industry’s demand for CASA and term deposits, and long-term borrowings as banks seek to expand their stable funding base to support future asset growth.