BSP adopts Basel III LCR framework

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The central bank will adopt the Liquidity Coverage Ratio (LCR) framework under the Basel III regime, which promotes discipline in mitigating liquidity risks among big banks.

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In a statement on Tuesday, the Bangko Sentral ng Pilipinas (BSP) said its policy-making body Monetary Board has approved the LCR framework “aimed at strengthening the liquidity position of universal and commercial banks (U/KBs).”

Under the new rule, the BSP said big banks in the country, including foreign bank branches, will be required to 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,” it stated.

To provide banks with adequate transition to the new prudential standard, the Monetary Board have set an observation period from July 1 this year to end-2017.

During the period, banks will start reporting their LCR to BSP.

Beginning January 2018, the LCR threshold that banks will be required to meet will be 90 percent, which will then be increased to 100 percent beginning January 2019.

Based on industry simulations, BSP believes that big banks will readily comply with the new standard.

The central bank said 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,” it explained.

The LCR is one of the components of the new liquidity standard under Basel 3 reform package issued by the Basel Committee on Banking Supervision (BCBS).

The LCR promotes discipline in mitigating liquidity risks. This is consistent with the broad efforts to boost Financial Stability, which is a key policy objective of the BSP.

Another framework under the Basel III 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 and the BSP said that the exposure draft might be issued within the year.

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