The Monetary Board has approved the adoption of minimum prudential liquidity requirements for thrift banks (TBs), rural banks (RBs), cooperative banks (CBs), and quasi-banks (QBs), which are designed to enhance the covered BSP-supervised financial institutions’ resilience to liquidity stress events. With this new development, all banks and QBs will be subject to calibrated minimum prudential liquidity requirements. The BSP first rolled out regulatory minima for universal banks (UBs) and commercial banks (KBs) through the implementation of the Liquidity Coverage Ratio (LCR)1 under Circular No. 905 dated 10 March 2016.
TBs, RBs, CBs, and QBs will be subject to different measures depending on whether they belong to a banking group or not. Those that are subsidiaries and affiliates of UBs and KBs will be subject to the LCR, which already applies to their parent-institutions. This approach promotes consistency in the management of liquidity risk across a financial group. The subsidiary banks and QBs will be subject to a minimum LCR of one hundred percent (100%) from 1 January 2019 onwards.
The stand-alone TBs, RB, CBs, and QBs, on the other hand, will be subject to a Minimum Liquidity Ratio (MLR) of twenty percent (20%) by 1 January 2019. The computation of the liquidity ratio is simple and straightforward. It is expressed as a percentage of a covered institution’s eligible stock of liquid assets to its total qualifying liabilities. The stock of liquid assets are required to be unencumbered and readily liquefiable, while the qualifying liabilities include both on-balance sheet and off-balance sheet commitments. Based on impact studies, BSP believes that covered institutions will be able to readily adjust to the new standard.
TBs, RBs, CBs, and QBs, will be required to monitor the level of their respective ratios throughout 2018. The BSP will also use this period to determine whether adjustments are needed. Once the minimum requirements are implemented in 2019, the BSP will address breaches in accordance with the persistence and gravity of the breach. Supervisory actions may therefore range from heightened monitoring, to requiring remedial measures, and finally, imposing sanctions.
The BSP considers the adoption of the LCR and the MLR as a significant step in aligning its supervisory framework with international standards. It also illustrates the BSP’s commitment to the application of proportionality in its approach to supervision. This reform is complemented by the recent revision of the Liquidity Risk Management Guidelines under Circular No. 981 dated 3 November 2017 and the forthcoming guidelines on the implementation of the Net Stable Funding Ratio.
1 The minimum Liquidity Coverage Ratio for universal and commercial banks is 90% beginning 1 January 2018 and 100% from 1 January 2019 onwards.