The National Bank of Cambodia (NBC) is requiring financial institutions to gradually phase in a higher liquidity coverage ratio (LCR) to ensure sustainable growth in the industry and avoid crises.
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The move follows a warning from the International Monetary Fund in November last year that current credit growth could pose an increasing risk to the financial sector. It said that the private sector credit has grown by an annualized rate of nearly 30 percent over the past three years, and rose to about 33 percent by the second quarter of last year. The credit-to-GDP ratio doubled over this period to more than 50 percent and the loan-to-deposit ratio surpassed 100 percent in early 2015.
A December 23 prakas from the NBC set the criteria for calculating LCR and a minimum LCR requirement for deposit-taking banks and financial institutions. “This prakas aims at promoting short-term resilience of each institution’s liquidity risk profile; ensuring that each intuitions has an adequate stock of unencumbered liquid assets that can be converted into cash at no or little loss of value in markets,” it reads.
Chea Serey, a director general at the NBC, told Khmer Times that the implementation of the new LCR is in line with what other countries in the region are doing. It is also in line with the new Basel III guidelines. “The experience from the 2008 global financial crisis indicated that what was thought to be very liquid may turn out not to be that liquid during a crisis. That is why LCR was introduced to strengthen liquidity of financial institutions,” Ms. Serey said.
She said that the prakas on LCR is a measure by the NBC to strengthen banks liquidity positions and avoid the type of 2008 crisis where financial institutions (FIs), like Lehman Brothers, could not find liquidity in time of stress. “The LCR helps FIs sustain a period of stress necessary for corrective action to be taken by the FIs’ management or supervisor to the FIs to be closed down in an orderly manner or for the central bank to take appropriate measures,” she added.
Grant Knuckey, chief executive officer for ANZ Royal Bank said that LCR is the one of the major steps for making the industry healthier. “The LCR is probably the most important regulatory change for the industry in many years. Personally I feel it is a very positive move by NBC that will promote stronger financial institutions and more prudent credit disciplines,” Mr. Knuckey said.
“It is being introduced in a phased manner, so should not produce an abrupt impact. However, I believe it will produce a fairly immediate change in mindset within the banking sector from one focused on uncurbed loan growth to one that better considers liquidity and sustainability. This is unequivocally a good thing in my view,” he added.
Stephen Higgins, managing director of research firm Mekong Strategic Partners, also expressed support for the measure to reduce risks in the industry. “The new prakas is likely to curb the lending growth of some banks, while other banks that are highly liquid such as ANZ Royal will see a fairly limited impact,” Mr. Higgins said.
“The prakas will significantly increase the liquidity requirements for a number of banks, however the long transition period out to 2020 will minimize adverse impacts at an overall system level,” he said, “As the NBC notes, strengthening liquidity requirements has been a focus for regulators globally since the Global Financial Crisis, and many countries have implemented such constraints.”
According to the prakas all the institutions have to meet liquidity needs for a 30-day liquidity stress scenario and ensure prompt corrective actions are taken by the institution’s management when the LCR potentiality falls below the minimum requirement.
The institutions are required to calculate LCR using a new reporting template introduced on January 1 that will be phased in over the next four years. From September 1, the NBC requires financial intuitions to have minimum LCR of 60 per cent of their adequate stock of eligible liquid assets, 70 percent by September 1, 2017, 80 percent by June 1, 2018, 90 percent by September 1, 2019 and 100 percent by January 1, 2020.
Chea Serey said that in terms of implementation, Basel III provides countries flexibility in implementing the 100 percent LCR. “That is why many countries adopt incremental approach to the implementation of LCR,” she explained.
“To avoid unnecessary pressure on lending activities and profitability of Financial Institutions when they hold more liquid assets, and taking into account the Cambodian context, NBC is phasing in implementation over 4 years,” Ms. Serey said.
She added that the move puts “limited pressure” on the growth of FIs because it gives them time to adjust to and they already have excess liquidity.