Bank stress tests ordered

BANKS must conduct regular stress tests to monitor liquidity positions for a variety of funding crunch scenarios, as the central bank tightens its watch on liquidity-related risks.

The Bangko Sentral ng Pilipinas (BSP) has required a minimum five-day stress period for banks and quasi-banks in monitoring liquidity positions under Circular 981 signed on Nov. 3.

“Stress tests should enable a bank/ quasi-bank (QB) to assess its ability to generate sufficient liquidity from the asset side, liability side, and contingent items of the balance sheet to meet funding needs under adverse conditions and to ensure that exposures remain in accordance with the bank’s/QB’s liquidity risk tolerance,” the issuance read.

These standards update guidelines issued back in 2006, with the central bank citing the need to upgrade standards to ensure “smooth” operations among banks and quasi-banks during period of normal times and stress scenarios.

The new rules on liquidity risk management ensure that financial firms can maintain enough money supply to meet “both expected and unexpected cash flows and collateral needs” for its day-to-day operations, without placing their financial footing in peril.

“Fund management practices shall ensure that liquidity is not consistently maintained at a high costs, from concentrated sources, or through undue reliance on funding sources that may not be available in times of financial stress or adverse changes in market conditions,” the BSP circular read.

The central bank requires banks to conduct stress tests on a regular basis “for a variety of short-term and protracted stress scenarios” in order to point out potential sources of strain which could affect a firm’s funding profile.

In particular, banks need to craft stress tests assuming institution-specific and market-wide crisis scenarios, as well as a combination of both. This rule extends to thrift, rural and cooperative banks, including acute deposit runs and increasing requests from customers to redeem time deposits ahead of maturity date.

Firms must assume at least five business days as the minimum stress period for a bank-specific crisis period, while a one-month duration should be assumed for a market-wide assumption, the BSP said.

However, lenders can choose to impose a longer minimum stress period depending on their risk profiles.

The stress tests must likewise cover exposures in all currencies, as well as for individual currencies where a bank has “significant” positions.

Liquidity-related risks must be a board-level concern, citing the need to establish internal protocols for monitoring, measurement, and control.

The tighter standards will kick in by September 2018, allowing room for banks to adjust to the new standards. •