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BSP gives banks 10 months to comply

(Liquidity risk policies)


By Lee C. Chipongian

The banking sector has until September 1 next year to comply with the central bank’s revised rules on liquidity risk management to set the environment for several guidelines that will upgrade liquidity standards which include intraday reporting requirements.

The Bangko Sentral ng Pilipinas (BSP) in a statement over the weekend said they will release four new regulations at least within the timeframe, following the 2016 issuance of the Basel 3 reform-related liquidity coverage ratio (LCR).

The BSP is expected to approve guidelines on the introduction of a minimum liquidity ratio requirement for stand-alone thrift, rural and cooperative banks and quasi-banks; the amendment of the LCR standards for subsidiary banks and quasi-banks of universal and commercial banks; the implementation of the net stable funding ratio (NSFR); and intraday liquidity reporting requirements. The NSFR is part of Basel 3 liquidity standards.

According to the BSP, the amended liquidity rules will “largely impact complex banks” and quasi-banks, such as on:

*Foreign currency management, which require banks to identify and monitor positions in significant currencies;

*Intraday liquidity management, which emphasize the need for banks to measure and anticipate the timing of intraday inflows and outflows so that they may contribute to the smooth functioning of payments and settlements systems;

*Intragroup liquidity management, which set out the expectation for supervised institutions that belong to a financial group to manage and control exposures across legal entities within the group and assess the possibility that a problem in one entity may spread to other entities because of market perception;

*Collateral management, which recognize the growing utilization of repo markets as a source of funds and the requirement for financial institutions to post margins for their derivatives transactions; and

*Stress testing and contingency funding plans, which relate the design of stress tests to banks’ specific circumstances and activities, and require greater consistency between the scenarios assumed in stress tests and the sources of funding identified in the contingency plan.

“The implementing circular gives covered supervised institutions until September 1, 2018 to develop or revise their policies and procedures and ensure that these are in accordance with the requirements of the revised guidelines,” the BSP reminded banks.

The most recent revisions – approved on October 12 – amends the 2006 liquidity risk management rules. The BSP said the changes reflect the “significant local and international events and developments (that) have highlighted the importance of banks’ effective management of liquidity risk in ensuring that they function smoothly not only during normal times but also under stress.”

“Liquidity risk stems from the inability of a financial institution to meet its obligations when they come due without incurring unacceptable costs. Banks are exposed to liquidity risk as they take advantage of opportunities to expand lending activities, enter new markets, engage in and offer innovative products, and grow their off-balance sheet transactions. They must also manage liquidity amid intense competition for retail and wholesale funds,” said the BSP.

The central bank said the guidelines zeroed in on a bank’s board of directors ability to “clearly define the tolerance for liquidity risk in a manner that can easily be communicated and understood by personnel.”

“On the other hand, it falls upon Senior Management to develop funding strategies that are aligned with the set risk tolerance. The strategies must ensure the availability of stable funding sources, the diversification of maturities, and the preservation of alternative funding sources,” it added.

The guidelines also recognize the individuality of each bank, particularly for complex banks versus simple banks. “In measuring risk, simple banks may use static cash flow projections based on balances as of a point in time to determine funding gaps over different time horizons. Complex institutions, however, are expected to employ dynamic approaches that factor in the future changes in their activities and the impact of these changes on their balance sheets,” noted the BSP.

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