Banks to feel short term pain from new liquidity rule

Philippine banks are expected to experience short-term pain after the Bangko Sentral ng Pilipinas (BSP) directed them to hold enough liquidity or stable sources of funding for one year, BMI Research said.

“Banks are likely to feel shortterm pain in the form of higher funding and transition costs, while businesses could see the availability of long-term financing drop,” the research arm of the Fitch Group said.

The BSP has adopted the net stable funding ratio (NSFR) under Basel III for the larger universal and commercial banks to further strengthen their ability to withstand liquidity stress.

This complemented the liquidity coverage ratio (LCR) first rolled out on July 1, 2016, and came into full effect last Jan. 1.

“In general, we believe that banks will likely be forced to cut back on short-term wholesale funding and raise deposit rates to attract more retail deposits, which could see funding costs increase over the coming quarters,” BMI said.

It added the adoption of the NSFR under Basel III by Philippine commercial banks is positive for financial stability over the long run.

“We note that this is unlikely to be a big issue for most Philippine banks given that the overall industry loan-to-deposit ratio stood at 74.3 percent as of April 2018. There will also likely be an increase in the issuance for longer-dated debt by banks with a maturity of one year or greater, which could lead to a steepening of the yield curve,” it added.

According to BMI, banks are likely to be discouraged from conducting business that involve higher required stable funding.

“This may see banks cut back on long-term lending, undermining banks’ traditional role in liquidity and maturity transformation in the economy. This poses downside risks to economic growth in the Philippines given that the country has an underdeveloped capital markets and businesses rely more on banks for long-term financing,” BMI said.

Under the NSFR, universal and commercial banks are required to put up a 100 percent buffer enough to cover one year. The adoption of the NSFR would also be patterned after the 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 (HQLAs) easily convertible to 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 last January. Earlier, Moody’s Investors Service senior analyst Simon Chen said Philippine banks would benefit from the adoption of the 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.

Chen added 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.