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MB Liberalizes Rules on the Issuance of LTNCTDs


The Monetary Board (MB) issued new guidelines liberalizing the issuance of Long-Term Negotiable Certificates of Time Deposits (LTNCTDs).

LTNCTDs are peso-denominated deposit instruments with a tenor of at least five years. Since LTNCTDs have a fixed minimum tenor of five years, issuance of LTNCTDs effectively “lengthen” the maturity profile of funds sourced by banks. Such longer-term funds can be used to better match against their long-term loan exposures. All LTNCTD issuances are subject to MB approval.

To the public, LTNCTDs behave like a fixed-term investment issued by a private entity. The instrument can be traded between one holder to another but the principal itself cannot be withdrawn prior to its maturity.

Prior to the liberalization, LTNCTD offerings were limited to Php 5 billion per issue, while total outstanding LTNCTDs were capped at 300 percent of an issuing bank’s capital.

Lengthening the maturity profile of deposits has long been a challenge since the majority of deposits in Philippines are in the form of savings deposits which can be withdrawn by depositors as needed. By default, then, banks have to finance their term loans with funds whose maturity profile is substantially shorter. This creates a mismatch in the tenor of assets versus liabilities and banks address this by often having the interest rate on long-term loans reset annually.

BSP Governor Amando M. Tetangco, Jr. noted that “the gains of having more long-term deposits should ultimately accrue to the borrowing public.” He pointed out that “having less of the tenor mismatch reduces systemic risk and that is itself already a gain.” He added though that with more long-term deposits, the risk borne by borrowers through annual repricing of their obligation is reduced while banks also face less of a refinancing risk.

The lifting of LTNCTD limits comes with further refinements that promote issuer accountability. Under the new guidelines, the MB raised the reserve requirement for these deposit instruments from three to six percent of outstanding LTNCTDs.

Likewise, any portion of an approved LTNCTD that is not issued within six months of its approval will be forfeited. This ensures that banks will structure an LTNCTD issue size which they believe they can sell within the six month period.

The new rule also requires the listing of LTNCTDs on an accredited exchange.  This is consistent with the fact that an LTNCTD has investment-like features and can be traded in the market before its date of maturity. With this requirement, the new guideline is aligned with global best practice on marketable securities by enhancing transparency, instilling price discovery and ultimately providing investor protection.

The new rule on LTNCTDs reflects the nexus between banking reform and capital market development. Having banks with stronger balance sheets operate in a well-functioning capital market can only boost financial stability, which is a key policy objective of the Bangko Sentral ng Pilipinas.

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