MAS Proposes Changes To Liquid Asset Requirements For Banks

Source : The Business Times, October 27, 2007

They can hold a broader range of assets as buffer against sudden drain











THE Monetary Authority of Singapore (MAS) has published a consultation paper on proposed changes to the cash and liquid asset minimum requirements for banks here.

Under the proposed changes, banks will be allowed to hold a broader range of assets as part of their buffer against a sudden drain on their liquidity.

Related Link - http://tinyurl.com/ytos6h
MAS' consultation paper

The risk posed to the banking system due to a lack of liquidity has been amply demonstrated in recent weeks, after the financial market turmoil triggered by problems in the US mortgage market eventually led to a bank run on UK mortgage lender Northern Rock.

Some commentators have even argued that central banks have in recent times placed too much emphasis on monitoring banks' credit risk exposures, while neglecting to assess their vulnerability to liquidity risk.

To ensure that banks here are able to react quickly to liquidity stress situations, the process for drawing down their liquid reserves with the central bank has also been streamlined, said MAS yesterday.

If the proposed changes are approved, the range of instruments eligible as liquid assets will be expanded to include Singdollar debt securities and sukuk - Islamic bonds - with a sufficiently high credit rating, or those issued by statutory boards here.

The current MAS rules define liquid assets eligible for inclusion in the buffer in much narrower terms, restricting banks mainly to holding cash and Singapore government bonds to meet the regulatory requirements. Corporate debt securities - even top rated ones - are excluded.

The proposed changes are expected to give banks 'greater flexibility in managing their liquid assets portfolio', said MAS in a statement.

With the new rules, any Singdollar debt securities with a total issue size of at least $200 million rated as investment grade or higher by international ratings agencies Moody's, Fitch and Standard & Poor's will qualify as liquid assets. Higher values will be assigned to debt with better credit ratings.

MAS said that it 'may consider including securities rated by other agencies where appropriate in future'. The central bank consulted the industry last year on the proposed changes to its liquidity risk supervision framework and it has included some of the industry responses it received in the consultation paper released yesterday.

Several respondents argued that some undrawn commitments such as credit facilities offered by banks should be excluded from the liability base used in computing how much they need to hold in liquid assets.

MAS said that its 'guiding principle is to include items that the bank is committed to and which would pose liquidity risk to the bank should the customer utilise or call upon the commitment'. These would include the unused portion of guarantees, stand-by credit facilities or stand-by letters of credit, it said.

But MAS said that it would allow banks to exclude such commitments from their liability base 'provided the bank has the contractual unconditional right to refuse drawdown'.

Comments on the proposals should be submitted to MAS by Nov 26.