BoB fines banks P1m for breaching liquidity limits
Brian Benza | Wednesday September 16, 2015 16:01
“Towards the end of 2014, some banks experienced significant short-term liquidity shortages, to the extent that their liquid assets to total deposits ratio fell below the statutory prescribed limit. Consistent with the Banking Act, a monetary penalty fee of P892 263 was levied on all non-compliant banks,” said the central bank in the 2014 Banking Supervision Annual report.
The Banking Act prescribes that commercial banks are required to keep at least 10 percent of their assets in liquid form such as cash, BoB certificates and current account balances with domestic banks.
According to the Banking Act, violation of the liquid asset ratios attracts a penalty of not more than 0.1 percent of the shortfall amount although the BoB can use its discretion to trigger related penalties and increase the amount, particularly for repeat offenders.
The liquidity challenge faced by the banks was part of sweeping changes in the sector that was previously characterised by excess liquidity, super normal profits and low deposits rates.
In a bid to shore up their liquid assets, commercial banks in 2014 transferred deposits from foreign banks to local commercial banks. However, the BoB does not recognise commercial banks’ deposits with foreign banks as liquid assets.
“The industry balances due to other local banks as an alternative source of funding registered a notable growth rate of 157 percent in contrast to a growth rate of 5.6 percent in 2013,” the central bank said. On its part, the central bank in April this year also halved the primary reserve requirements to inject P2.3 billion into the banking system.
The primary reserve requirements reduction marked a ‘new normal’ in the banking industry where the central bank’s role has been reversed from liquidity absorption to provision as excess liquidity dried up.
According to the Supervision Report, the banking sector total statutory liquid assets were however almost constant at P7.4 billion in 2014.
“The liquid assets to total deposits ratio continued to be on a downward trajectory, reaching a low of 14.5 percent as at December 31, 2014,” read the report. However, the central bank says the funding structure of the banking sector has remained unchanged in the past five years as customer deposits continued to be the main source of funding. Customer deposits increased by six percent to P51.5 billion in December 2014, but decreased in terms of the share of total funding to 75.7 percent in 2014 compared to 81 percent in the previous year.