MANILA, Philippines – Over the weekend, Bangko Sentral ng Pilipinas said in a statement that it will replace the three existing liquidity-related policies imposed on commercial and universal banks. In lieu of these policies, a Liquidity Coverage Ratio or LCR will be implemented starting January 1, 2018.
Last year, the central bank announced a phased-in imposition of the Liquidity coverage ratio. The new policy will require large banking companies operating in the country to hold easily convertible, high-quality assets to cover total net cash outflows for a period of 30 days. The buffers are intended to let lenders keep their liquidity at a time of when liabilities become payable.
The Deputy Governor of BSP Nestor A. Espenilla, Jr. had previously said that assets of the bank that are considered high-quality include funds parked with the BSP, cash, and investments in government securities, among others.
As the new measure will be imposed, the central bank said it will forego its present requirements for banking companies to maintain liquid assets of not less than half of their liabilities including government deposits. Currently, liquid assets denominated in foreign currency should match the amount of FCDUs or foreign currency deposit units held by the lenders. Existing policies require banks to hold foreign currency denominated assets equal to 70 percent of FCDUs that are in the same currency as such liabilities.
Espinilla said that the introduction of the Liquidity coverage ratio is expected to cover all of the buffers in one go. He further added that the LCR will help the regulating agencies and the banking firms themselves to gauge better the liquidity standing of covered institutions.
An observation period was designated by the central bank in order for the new liquidity policy from July last year up to the end of this year. During this period, banks are required to report their LCRs.
By the beginning of 2018, asset coverage of the banks should account for not less than 90 percent of their total cash outflows. The same measure must reach 100 percent by January 1, 2019.
The Liquidity coverage ratio policy is part of reforms under the Basel 3 regime. This was crafted by global policy makers in order to prevent a repeat of the 2008 Global Financial Crisis and to promote risk management.
The financial system of the country continues to have an ample market liquidity. Money supply keeps on growing at 12.4 percent in December. The demand in the country for credit mainly drives the money supply to grow sustainably.