Friday, May 11, 2018 10.12AM / Ecobank Research
Rwanda’s central bank, Banque Nationale du Rwanda (BNR), has rolled out Basel III liquidity measurement regime for commercial banks, effective February 2018. The new regime incorporates Basel III’s flagship Liquidity Coverage Ratio (LCR) as well as Net Stable Funding Ratio (NSFR)-two liquidity measurement standards created by the Basel Committee of Banking Supervisors (BCBS), the primary global standards setter for the prudential regulation of banks, to drive two separate but complimentary objectives in the realm of liquidity.
LCR was a classic response from the BCBS to the ease with which liquidity evaporated when asset prices collapsed-as was the case during the 2008/09 global financial crisis (GFC). LCR was designed to promote short-term resilience of a bank’s liquidity risk profile by ensuring banks have sufficient high quality liquid resources to survive an acute liquidity stress over a time horizon of one month. These resources have been designated as high quality liquid assets (HQLA). They are classified as high quality due to a number of unique characteristics: (i) low risk; (ii) easily valued; (ii) being listed and tradable in an active, developed and recognized market; (iv) tradable in an active outright sale or sales and repurchase markets at all times; and (v) no operational restrictions that can prevent them from being converted into cash with little or no haircuts in private markets during stressed conditions.
In as far as LCR is concerned, the BNR has set two classes of HQLA and issued a comprehensive framework for (i) determining the eligibility of HQLA; and (ii) calculating the value of HQLA and issued a series of predefined factoring multiples applicable to eligible asset classes. Further, for purposes of LCR, the BNR has also issued guidelines for determining cash outflows and inflows-including explicit run-off or drawdown factors for various funding sources (stable and non-stable). However, the apex bank has stated that total expected cash inflows that may be included in LCR determination should not exceed 75% of the total cash outflows such that at least 25% of expected cash outflows are to be met by HQLA. Henceforth, banks will be required to maintain LCR of 100% and above, at all times.
The NSFR, on the other hand, was created to drive long term resilience of a bank’s liquidity profile. It is designed to create additional incentives for a bank to fund its balance sheet activities with more stable funding sources. Indeed, NSFR has a time horizon of one year. It also takes into account the behavioural and contractual characteristics of both liabilities and assets in determining the stability of funding sources. NSFR, as per the BNR guidelines, will be a function of available stable funding (ASF) and required stable funding (RSF). ASF is the portion of liabilities that, behaviourally and contractually, are sticky (and are not volatile in nature). RSF, on the other hand, describes the liquidity profiles of funded assets as well as the potential for contingent liquidity needs arising from a bank’s off-balance sheet engagements. Essentially, NSFR is all about match-funding of assets, both behaviourally and contractually, over a one-year horizon, and aims to limit over-reliance on short-term wholesale funding, which has been a problem for a number of banking sectors in our Middle Africa coverage-most notably East Africa. Banks will be required to maintain NSFR of 100% and above, at all times.
Apart from a bank’s internal liquidity management policies, the BNR has also issued five other liquidity monitoring tools for banks, namely maturity mismatch analysis, cashflow projections, stock of liquidity assets, diversification of funding liabilities and reliance on parent and other subsidiaries. The BNR has also issued an accompanying strict disclosure guidelines for both LCR and NSFR.
This is by far the most comprehensive liquidity measurement regime in our coverage basket and, upon full implementation, will serve to bolster liquidity position of Rwandan banks. Indeed, it’s a stark deviation from the old liquidity measurement regime which only discounted current portion of funding liabilities (under three months) against liquid assets. The regulatory minimum was set at 20%. It did not factor in cashflows-and neither did it offer a robust assessment of stability of funding sources.
However, we do expect voluminous haggles between banks and BNR during the current implementation phase, as it will involve significant balance sheet rearrangement(s). Consequently, we believe banks will need until December 2018 to fully roll out the public disclosure(s) element of the guidelines.
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