BSP plans liquidity tests for big banks

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) plans to require domestic systemically important banks to maintain access to its short-term lending facility and to test that access every year, as part of reforms intended to speed up liquidity support during periods of funding stress.

The Discount Window Facility (DWF) is a supplementary source of short-term funds that eligible banks may tap when they need liquidity, or money readily available to meet withdrawals and other payments.

Banks may borrow through the facility by using eligible loans they have extended to customers or securities issued by the national government and the BSP as collateral.

“The facility supports confidence in the banking system and contributes to overall financial stability by providing banks with timely access to liquidity when needed,” the BSP said in a draft circular.

Under the proposal, all domestic systemically important banks – or lenders whose size and links to other institutions make them critical to the wider financial system – will be required to maintain a DWF line and conduct an access test annually.

Other eligible banks would be encouraged to establish similar lines as part of their contingency funding plans and periodically test their ability to use the facility.

Maintaining a DWF line will not automatically entitle a bank to borrow, however. Each withdrawal will remain subject to the central bank’s requirements.

Domestic systemically important banks will be given three months from the circular’s effectivity to comply with the requirement.

“The DWF is not intended as a substitute for banks’ sound liquidity risk management practices, including adequate liquidity buffers and access to market-based funding sources,” the central bank said.

The BSP is also proposing to simplify documentary and eligibility requirements, provide financially sound banks with more options for collateral and allow loan documents to be checked before a bank needs to borrow.

“Through these enhancements, the BSP seeks to improve banks’ operational preparedness to access the facility and strengthen the DWF’s role as a reliable source of contingent liquidity support in times of need,” it said.

The BSP’s Department of Loans and Credit will conduct the assessment when a bank applies for a DWF line and every six months thereafter using the latest available supervisory data.

Banks that fail to meet any of six financial-soundness conditions will be allowed to borrow only against securities issued by the national government or the BSP.

The conditions include keeping the bank’s nonperforming loan ratio at or below the industry average. NPLs are debts on which borrowers have stopped making scheduled payments.

Banks must also meet reserve requirements for two consecutive weeks, maintain a positive demand deposit account balance with the BSP and keep past due loans to directors, officers, stockholders and related interests within five percent of total past due loans.