In 18 months, Thai banks need to start complying with a new Basel III liquidity risk management standard recommended by the Basel Committee on Banking Supervision. Called the Net Stable Funding Ratio (NSFR), banks will need to manage an interplay of this additional Net Stable Funding Ratio (NSFR) requirement alongside the existing Liquidity Coverage Ratio (LCR) requirement.
The LCR looks at the amount of unencumbered, high quality liquid assets an institution holds over 30 days that can be used to offset the net cash outflows it would encounter under an acute short-term stress scenario specified by supervisors. The scenario has to include systemic shocks and institution-specific circumstances derived from the global financial crisis. It took effect January 1, 2015.
Meanwhile, the NSFR, which takes effect January 1, 2018, measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets that are funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.
The standard requires a funding strategy that is expected to be stable over a one-year time period based on liquidity risk factors assigned to balance sheet and contingent liquidity exposures.
Defined as a ratio of available amount of stable funding to a required amount of stable funding, the NSFR must be greater than 100%. Ultimately, this requirement is intended to promote longer-term structural funding of banks' balance sheets, off-balance sheet exposures and capital markets activities.
“These two liquidity requirements will impact the profit and loss statement for banks. What’s more, there is the looming 2020 ASEAN Banking Integration Framework which will introduce more competition--as well as opportunity--for banks based in ASEAN. Banks in this region will need to get ready for all these challenges,” says Tham Soon Kit, Risk Practice Director, Asia Pacific at information services provider Wolters Kluwer.
Driver of the next wave of banking industry growth
The next wave of ASEAN banking industry growth will likely be driven by the recent launch of the ASEAN Economic Community on December 31, 2015. One of its aims is to achieve ASEAN-wide banking sector liberalization as envisaged by the ASEAN Banking Integration Framework (ABIF) by 2020. This growth will likely result in progressively bigger balance sheets for financial institutions. Consequently, Asset Liability Management (ALM) risk management and liquidity risk management will likely be the priority items for financial institutions to enhance today to gain competitive edge in this new market.
“The interplay of LCR and NSFR liquidity risk requirements commencing January 1, 2018 will likely test the effectiveness of the liquidity transfer pricing solution currently used by financial institutions. On the other hand, the expansion of the ASEAN banking market will test how effective are financial institutions’ existing risk data aggregation and reporting solution to support the larger ASEAN customer base. There are at least 600 million underbanked young people with rapidly growing incomes. This is highly lucrative for ASEAN financial institutions in search of new markets in banking accounts, credit facilities and investment services,” says Tham. Tham was guest speaker at RiskASEAN 2016, a financial risk conference in Bangkok.
‘Practically speaking, what Thai and indeed ASEAN banks can do to comply with these new liquidity standards is to adopt integrated risk, performance and accounting management, and improve data collection, cleasing and analysis, he added.
If that’s not enough work for Thai banks, then they should further brace themselves. A new international accounting standard, the International Financial Reporting Standard 9 (IFRS 9) takes effect the following year on January 1, 2019. Also aimed at reducing global financial risk, IFRS 9 carries with it a whole set of changes. “With IFRS 9, banks need to be aware of a range of new developments. Importantly, there is the requirement to adopt an expected credit loss model in accounting. This will have an impact on banks’ profits as well,” says Matthias Coessens, vice president, finance and performance at Wolters Kluwer Asia Pacific.
Banks will also need to improve their credit scoring operations with IFRS 9. “As most banks in Thailand have not implemented the Basel Internal-Ratings Based (IRB) approach, it is expected that banks will have to revisit their existing credit scoring practices,” says Coessens. “The key is to start on time, as collecting data around scoring and defaults as well as relevant factors and scenarios takes time.”