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New measures to guard against bank liquidity risks

CHINA’S banking regulator announced new requirements yesterday for lenders to better guard the sector against liquidity risks.

The China Banking Regulatory Commission (CBRC) introduced three new indicators into a draft revised rule on liquidity risk management that will take effect on March 1.

The net stable funding ratio, one of the three new gauges, measures banks’ long-term stable funding to support business development, according to a CBRC statement.

The ratio will apply to lenders with assets of no less than 200 billion yuan (US$30.2 billion).

The high-quality liquid assets adequacy ratio, which evaluates whether banks have enough high-quality liquid assets to cover short-term liquidity gaps when under stress, will apply to lenders with assets below 200 billion yuan.

The liquidity matching ratio, which applies to all lenders, gauges how well bank assets and liabilities are matched in maturity. All three ratios are required to stay no lower than 100 percent.

The move can “help commercial banks improve their capability in liquidity risk management,” the statement said. It noted growing differences of various banks in business type and complexity, as well as “increasingly infectious liquidity risks in the banking system.”

Interest rate liberalization, financial innovation and stronger inter-bank connections made China’s financial sector more vibrant but also prone to risks.

Wang Zhaoxing, vice chairman of the CBRC, warned on Tuesday that liquidity risks were the largest threat to small and medium-sized banks.

“China’s financial supervision will be increasingly stricter, with tougher punishment on market irregularities and imprudent operations,” Wang said at the annual meeting of China’s city commercial banks.

The CBRC’s current rule on liquidity risk management only involves two indicators, namely the liquidity ratio and the liquidity coverage ratio.

The former measures banks’ ability to repay their liquid liabilities with liquid assets. The latter, while similar to the newly introduced high-quality liquid assets adequacy ratio, only applies to banks with assets no less than 200 billion yuan.

The addition of the Net Stable Funding Ration follows the new global capital rules known as Basel III, the CBRC said.

To avoid short-term impact on bank business operations, the revised rule sets grace periods for the implementation of the high-quality liquid assets adequacy ratio and the liquidity matching ratio. The former ratio requirement should be met by the end of 2018, and the latter by the end of 2019.

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