RIZWAN BHATTI

KARACHI: Under Basel III reforms package, the State Bank of Pakistan (SBP) has decided to adopt the liquidity standards as proposed by the Basel Committee on Banking Supervision (BCBS).

According to BPRD Circular No. 08 of 2016, issued on Thursday, the experience of Global Financial Crisis (GFC) illustrated that liquidity and funding risks are critical risk factors that can lead to any bank’s insolvency/failure in case of inadequate risk management practices.

Therefore, in view of resultant changes in the international regulatory landscape, the State Bank intends to adopt the liquidity standards as proposed by the Basel Committee on Banking Supervision (BCBS).

Accordingly, for measurement of the liquidity risk, revised global regulatory standards namely Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), along with a set of five risk monitoring tools are being implemented.

Both of these ratios aim to achieve two separate but complementary objectives and their calculations involve assessing bank’s overall liquidity position through detailed evaluation of assets, liabilities and off-balance sheet activities, the SBP said.

The LCR is a stressed liquidity ratio to be calculated on monthly basis. The objective is to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they preserve enough unencumbered high quality liquidity assets (HQLA) to survive total net cash outflows for the next 30 days calculated under certain assumptions, it added.

Similarly, the objective of NSFR is to reduce funding risk over a longer time horizon by requiring banks to support their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding problems. NSFR is to be calculated on quarterly basis.

According to SBP, the transitional arrangements (described below) are closely in line with the internationally agreed timelines and intended to ensure smooth implementation by allowing sufficient time to banks/DFIs to make necessary adjustments in their systems/MIS. 

For LCR, reporting will commence from January 31, 2017 on monthly basis and for banks it will be 80 percent by end March 2017, 90 percent in Dec 2017 and 100 percent by Dec 2018. While no minimum requirement of LCR is being stipulated for DFIs till further instructions; however, DFIs will report their respective LCR on the prescribed format to the SBP on monthly basis.

In addition, NSFR reporting on parallel run basis will commence from March 31, 2017 on quarterly basis and effective from December 31, 2017 onwards, NSFR of at least 100 percent is to be maintained. The SBP has asked banks and DFIs to report on prescribed formats within 14 working days effective from March 31, 2017.