Bank compliance with new liquidity requirements adopted by the Bangko Sentral ng Pilipinas (BSP) could pose an indirect downside risk to economic growth, a Fitch Group unit said.

In a report released late last week, BMI Research said it expected “Philippines banks 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 newly adopted net stable funding ratio (NSFR).

The NSFR, a measure of a bank’s ability to fund liquidity needs over a year, is part of the Basel III reform package drawn up by international regulators in response to the 2007-2008 global financial crisis.

 BMI noted that the NSFR covers the long-term aspect and mandates the amount of available stable funding (ASF) to exceed the required stable funding (RSF) for a one-year period of extended stress.

Beginning January 1, 2019, banks and select subsidiaries will have to maintain an NSFR of 100 percent on both solo and consolidated bases.

 BMI pointed out that businesses could see drop in the availability of long-term financing as banks are likely to be discouraged from conducting business that involve higher RSF.

“This may see banks cut back on long-term lending, undermining banks’ traditional role in liquidity and maturity transformation in the economy,” it said.

“This poses downside risks to economic growth in the Philippines given that the country has an underdeveloped capital markets and businesses rely more on banks for long-term financing,” BMI added.

In general, it acknowledged that banks would 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.

However, BMI said this was unlikely to be a big issue for most Philippine banks given that the overall industry loan-to-deposit ratio stood at 74.3 percent as of April 2018.

“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 continued.

Overall, the research firm stressed that that the adoption of the NSFR would be positive for financial stability over the long-run.

It highlighted that the rationale for NSFR was to limit structural maturity mismatches and to reform the asset and liability structures of banks to make them less prone to cyclical factors.

“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 will continue to help safeguard financial stability,” BMI said.


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