The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank believes its proposed bank liquidity standards “will be much simpler and cheaper” to implement than global rules but still have the same or “super-equivalent” effect.

The Bahamian regulator, setting out how it plans to meet the latest liquidity risk management principles set by the Basel Committee on bank supervision, says it is seeking to introduce a regime that complies with global standards but is more suited to the realities of the local banking industry.

Launching a two-month consultation on its proposals, the Central Bank said it plans to combine the separate liquidity regimes for the Bahamian commercial and international banking sectors into one single standard.

But the implementation of similar standards for credit unions, which also fall under the Central Bank’s regulatory oversight, will be “deferred” until the new regulatory framework has been implemented by the banking sector.

Unveiling its goals, and the rationale behind them, in a paper issued on Christmas Eve, the Central Bank said: “The Basel standards are intended for much more complex banking systems - in much more complex capital markets - than exist in The Bahamas.

“Accordingly, and similarly to the Central Bank’s proposed implementation of Basel III capital standards, the proposed liquidity standards will be much simpler and cheaper to comply with than the full Basel rules text. The outcome will be equivalent or super-equivalent to the full Basel rules text.”

The Basel Committee is the acknowledged standard-setter for prudential risk management by the global banking industry, establishing capital ratios and other targets institutions must adhere to as a means to avoid running into financial difficulties.

The Central Bank’s consultation paper added that liquidity risk management, which is intended to ensure banks have sufficient cash reserves on hand to deal with all eventualities, was “a key banking function”.

It credited Bahamian commercial banks, in particular, with maintaining traditionally “high surpluses of liquid assets” well above international regulatory thresholds. As at June 30, 2018, the sector’s liquidity surplus was around 170 percent above legal minimum requirements.

With the banks’ role in supplying credit essential to the Bahamian economy’s ability to operate, the regulator added: “Historically, Bahamian banks have been comfortably liquid. Any disruption to the banking sector, however, could have widespread adverse effects on the economy from both bank-specific and systemic standpoints.

“Bahamian internationally-licensed banks have less direct effect on the local economy, but also require strong liquidity risk management - both for their own preservation, and the preservation of the Bahamian reputation for financially-sound banks.

“For these reasons, it is important that our regulatory framework for liquidity risk keeps pace with international standards. The proposals in this paper will improve our existing liquidity standards, monitoring tools and risk management systems, consistent with the Basel III international standard.”

The Central Bank of The Bahamas Act currently requires commercial banks to maintain a statutory capital reserve equivalent to five percent of their Bahamian dollar liabilities.

This ratio can be increased to a maximum of 20 percent if required, while the Central Bank also employs a secondary reserve - called the Liquid Asset Ratio (LAR) - that requires commercial banks to maintain an average ratio of liquid assets (cash and equivalent instruments) equal to 20 percent of their demand deposits, 15 percent of savings and fixed deposits, and 15 percent of borrowings due to or from the regulator.

Under the new regime, the Central Bank is planning to do away with the LAR requirement but preserve the statutory capital reserve mandate. The same rules will apply to the international banking sector.

The Central Bank confirmed it plans to use the proposed reforms as an opportunity for regulatory consolidation. “The Bahamas currently has three separate liquidity regimes for domestic commercial banks, international banks and credit unions. None of these regimes is necessarily Basel III compliant,” it added.

“With these proposals, the Central Bank seeks to improve efficiencies that will result in one liquidity regime for all banks, while limiting costs where possible. Preliminary analysis suggests that this will be feasible for all or nearly all banks.”

But change will be delayed for credit unions. “The Central Bank has also considered the appropriateness of applying the new liquidity requirements to less complex SFIs (supervised financial institutions) such as credit unions,” the Central Bank said.

“As a supervisory matter, the Central Bank has determined that the applicability of the new liquidity framework will be deferred for credit unions until the LCR and NSFR have been implemented for the commercial and international banks.

“For the moment, these requirements will therefore apply to all public banks and/or trust companies, subsidiaries and branches of foreign banks and trust companies. These proposals exclude pure trust companies.”

LCR refers to liquidity coverage ratio, while NSFR means net stable funding ratio. The liquidity coverage ratio allows banks to assess whether they have an adequate supply of highly liquid assets, such as cash, that can immediately be available for use, whereas the NSFR measures the amount of stable funding a bank has available.