Liquidity ratio for commercial banks raised

Commercial banks operating in the country will be obliged to raise their liquidity ratio to avoid risks associated with sharp market fluctuations.

The Reserve Bank of New Zealand (RBNZ) said in its final 2009 bulletin that it had put in place the new requirements in its terms and conditions of registration in October 2009, applicable to all commercial banks operating in the country.

The new requirements will be implemented in three stages, the first of which, obliging banks to raise their liquidity ratio to 65%, will come into effect on April 1, 2010.

The second and third stages will see the requirements raised respectively to 70% and 75% but the dates have not yet been determined.

Solid foundation

The Bank said its new framework would provide a solid foundation for enhancing liquidity in the New Zealand financial system, which can be further developed as necessary in the coming years.

The new requirements are in line with the recommendations of the Basle (Switzerland) based Financial Stability Board (FSB) made to the G20 leaders in September 2009.

In that report, the Board had said that it was “substantially raising the bar for global liquidity risk regulation,” advocating in particular a new minimum global liquidity standard.

“We are also introducing a liquidity coverage ratio that can be applied in a cross-border setting; and a structural liquidity ratio to address liquidity mismatches and promote a strong funding profile over long-term horizons,” it had said.

FSB was established in April 2009 as the successor to the Financial Stability Forum, shortly after the G20 Summit held in London.

RBNZ said that following the new qualitative and quantitative requirements that will become effective on April 1, 2010, the mismatch requirements would act as a floor to the existing management of short-term liquidity risk of commercial banks and as such remain at the initial calibration.

“With the one-year core-funding ratio, however, the Bank is seeking to lengthen banks’ maturity profiles to provide greater protection against liquidity risk in the medium-to longer term,” the bulletin said.

Stating that a strong liquidity profile was important for all companies, the Bank said appropriate liquidity levels were critical to commercial banks.

Market discipline

“The maintenance of a sound and efficient financial system requires banks to hold a liquidity profile that is robust to funding shocks.

“The New Zealand banking system is concentrated and unusually reliant on short-term offshore funding by comparison with other developed countries,” the bank said, adding that the system remained vulnerable to liquidity shocks.

“The Bank has been working to develop new prudential requirements designed to strengthen the liquidity of the New Zealand financial system.

“We note that the new requirements come at a time when global regulators are looking to strengthen liquidity requirements in light of the recent financial crisis,” the bulletin said.

RBNZ introduced comprehensive disclosure requirements for New Zealand banks in 1996, with the belief that market discipline was an important complement to regulatory discipline, and that the disclosure regime ensured that the market had the information required to exercise that discipline.

It said New Zealand banks’ liquidity risk had until now been addressed purely as a part of this market discipline approach.

“Current disclosure rules require each bank to publish information about its approach to managing liquidity risk, and the bank’s directors must attest that the bank has had systems in place to monitor and control adequately its liquidity risk, and that those systems have been properly applied.

“However, the detail of the reporting is largely left to the banks’ own discretion.”

New liquidity requirements

Minimum ratio requirements calculated from banks’ financial data, including both on and off-balance sheet business;

1.       Rules and guidance on the risk management processes that banks should have in place to manage liquidity risk;

2.       Requirements for regular reporting to the Reserve Bank of data on their liquidity positions

3.       Requirements for banks to disclose publicly certain information on their liquidity risk and how they manage the risk