Banks face new funding rules

KUALA LUMPUR: The implementation of Bank Negara’s new liquidity requirements called the net stable funding ratio (NSFR) beyond Jan 1, 2019 could potentially lead to higher funding costs, lower margins and higher lending rates.

The NSFR, which is aimed at banks having longer-term cash, has been pushed back by at least another year (no earlier than Jan 1, 2019) before implementation, following considerable uncertainty on the foreign front in terms of meeting the internationally agreed timeline of Jan 1, 2018.

Bank Negara assistant governor Marzunisham Omar said several factors were considered before a decision was made to push the deadline back.

“We looked globally at the implementation timeline of other jurisdictions. This was important because our banks have a presence in other countries as well, and there is a divergence in the implementation timeline of the NSFR,” he said at a briefing.

“We need to give sufficient time to our banking institutions to meet the operational requirements that will be involved in fulfilling the NSFR requirements.”

The worry with pushing through the NSFR is that banks would need to raise longer-term cash rather than the shorter-term deposits they have in their books. The result of that requirement is that banks would need to issue more bonds to meet the NSFR standards, which could be more costly than what they are paying for current and savings accounts.

“The timeframe is a lot of time for banks in Malaysia to comply with the NSFR requirements,” said an analyst.

Marzunisham said the additional time given would also help provide greater clarity on how the banking institutions could calculate the NSFR.

“During this period, we will gather data that will help us be in a better position to assess how well our banks will be able to fulfil its requirements, as well as the possible implications on assets and liabilities of the banking institutions and their systems.”

The NSFR is a liquidity standard published by the Basel Committee on Banking Supervision, which forms part of the Basel III regulatory reforms. It requires banking institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.

Marzunisham said the standard complemented the Liquidity Coverage Ratio (LCR), which has been phased in since 2015.

“This will help the banks better manage and mesh their funding and business strategy.”

The difference between the LCR and NSFR is that the former looks at short-term deposits, while the latter deals with longer-term funding for banks.

The LCR looks at the amount of money a bank needs over a period of 30 days should there be a bank run. The introduction of the LCR saw banks in Malaysia competing for retail deposits.

As most loans are longer than one year, the NSFR would require banks to have an amount of funds that exceed the required needs for a one-year period.

Currently, Australia, Indonesia, Singapore and Hong Kong have proposed to implement the NSFR by Jan 1, 2018. Canada, the European Union and the United States have delayed their deadlines, while the Philippines, Thailand, China, South Korea and Japan have yet to confirm when they would be implementing the standard.

Marzunisham added that the timing of the NSFR implementation in other countries would not be an issue for local banks with a regional presence.

“Banks in Malaysia will follow the timeline set by Bank Negara, while banks with presence in other countries will comply with the regulations there. You go by where you operate.”

He also said most, but not all, of the local banks are sufficiently ready to conform to the NSFR. Marzunisham did not name the banks that had failed to meet the NSFR requirement as of now.

“The liquidity position of our banking system is good. The financial institutions have ample liquidity to withstand the short-term shocks.”

As at June 30, 2017, the banking system’s NSFR is estimated at above 100% – which was equal the Basel Committee’s ratio of at least 100% on an ongoing basis.

Marzunisham pointed out that the banking system’s LCR stood at 141% as at June 30, 2017, while the system NSFR is estimated at above 100%.

“More than three quarters of our banks are above 100%,” he said, adding that it was a misconception to assume that it was the local banks that weren’t ready for the NSFR implementation.

Marzunisham, however, said the NSFR implementation would not lead to higher loan pricing.

“In terms of price of the loans, there will be a lot of factors to consider; and with NSFR being no earlier than January 2019, there’s no reason to change the pricing of the loan.”

He added that the NSFR implementation would encourage banks to potentially offer more innovative products and come up with attractive instruments.

“At the moment, we don’t expect major effects on the borrowers, given the liquidity buffers that our banking institutions have at the moment.

“In addition, we also know about the level of competition in the market, which will encourage the banks to remain competitive, especially with regards to their product offering and pricing.”

Bank Negara is inviting public feedback on the proposed regulatory requirements for NSFR. Banking institutions have two months to submit feedback to the exposure draft.

On a separate matter, Marzu-nisham said he is optimistic on the level of deposit growth in the country. “There is a direct correlation between economic and deposit growth. With positive growth in the Malaysian economy, we believe that there would be a rise in deposits.

“Also, as we become more financially developed, consumers – both retail and business – have more choices in terms of where to put their money.”


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