The requirement of the Bangko Sentral ng Pilipinas (BSP) for banks to beef up their liquidity profiles will be good for the banking system in the long run, but will result in “short-term pain” for the sector, an international think tank said.
BMI Research, a Fitch Group subsidiary, assessed the impact of the BSP’s recently adopted net stable funding ratio (NSFR) guidelines for commercial banks and said the new rules will boost the Philippine banks’ stability in the long run.
In June the Monetary Board approved the adoption of the NSFR for universal and commercial banks in the country. The NSFR is a measure of the ability of a bank to fund its liquidity needs over one year.
“The BSP has typically been ahead of its regional peers when it comes to the adoption of macro prudential regulations and we believe that this [NSFR] will continue to help safeguard financial stability,” BMI Research said.
The think tank said, however, that Philippine banks are likely to feel “some pinch in the short term” in the form of higher transition and funding costs as they adjust their balance sheets in order to comply with the new standard. It also said the new standard is negative for financial intermediation in the country.
“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 Research said.
“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.
BMI Research said banks will likely be discouraged from conducting business that involves 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.”
The NSFR is the other half of the BSP’s liquidity guidelines for banks to comply with, according to the international Basel III standards. The other half is the liquidity coverage ratio (LCR), which was approved for implementation in early-2016.
While the NSFR ensures cash sufficiency for a year, the LCR covers a shorter period of over 30 days in which a bank shall hold sufficient high wuality liquid assets (HQLAs) that can be easily converted into cash to service their liquidity requirements.