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MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) has adopted new liquidity rules as part of its adoption of more stringent Basel 3 standards.
The Monetary Board has approved the liquidity coverage ratio (LCR) framework aimed at strengthening the liquidity position of universal and commercial banks, the BSP said in a statement on Wednesday, March 1.
The new framework is part of the Basel 3 reform package issued by the Basel Committee on Banking Supervision (BCBS).
Basel 3 is a global voluntary regulatory standard on bank capital adequacy, stress testing, and market liquidity risk. It was developed in response to the deficiencies in financial regulation revealed by the 2008 financial crisis.
Liquidity Coverage Ratio
Under the new rule, universal and commercial banks, including foreign bank branches, shall hold sufficient high quality liquid assets (HQLAs) that can be easily converted into cash to service liquidity requirements over a 30-day stress period.
This provides banks with a minimum liquidity buffer to be able to take corrective action to address a liquidity stress event or bank run.
The LCR is one of the components of the new liquidity standard under Basel 3. The other is the net stable funding ratio (NSFR) which looks at the liquidity requirements of banks over a longer period of one year.
The NSFR is being finalized. The BSP said that the exposure draft may be issued within the year.
The LCR should be seen as complementing the minimum capital adequacy rules. While the latter safeguards the industry over solvency risks, the LCR imposes a minimum standard to protect banks against liquidity risks which may happen even if a bank is still solvent, the BSP said.
The approval of the Monetary Board provides for an observation period from July 1, 2016 to end-2017, during which banks will start reporting their LCR to BSP.
The observation period provides the banks with adequate transition to the new prudential standard, the BSP explained.
Beginning January 1, 2018, the LCR threshold that banks will be required to meet will be 90%. It will be increased to 100% beginning January 1, 2019.
Based on industry simulations, the BSP believes that universal and commercial banks will readily comply with the new standard. – Rappler.com
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