New rules to reduce banks' liquidity risks

Revised norms to boost supervision and stability in financial sector

China has come out with new rules that will help commercial lenders better guard against liquidity risks, the banking and insurance regulator said on Friday.

The new rules, which will come into effect on July 1, will add three new indicators for gauging liquidity risks, according to the China Banking and Insurance Regulatory Commission.

One of the new measures is the net stable funding ratio, which measures banks' long-term stable funding to support business development. The ratio will apply to lenders with total assets of at least 200 billion yuan ($31.3 billion) and the minimum ratio is 100 percent.

The net stable funding ratio measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded, and the potential for contingency calls on funding liquidity arising from off-balance sheet commitments and obligations. It is a significant component of the Basel III accord, a set of financial reforms developed by the Basel Committee on Banking Supervision to strengthen regulation and risk management within the banking industry.

For banks that reported total assets of less than 200 billion yuan, the regulator requires them to apply the high-quality liquidity asset adequacy ratio, which is the bank's high-quality liquidity assets divided by short-term net cash outflow, and the minimum ratio is 100 percent.

If the indicator is higher, it shows that the bank's stock of high-quality assets is more sufficient and its ability to defend against the liquidity risks are stronger, according to the regulator.

Finally, all commercial banks are required to apply a minimum liquidity matching rate of 100 percent. The rate will help identify those banks that have potentially high risks arising from maturity mismatches. If the rate is lower, it shows that the bank has a problem in using short-term financing for long-term assets.

To soften the impact of the revised measures on financial markets, the regulator will implement the new rules step by step. Commercial banks could wait until the end of 2018 to meet the minimum high-quality liquidity asset adequacy ratio, which is temporarily lowered to 80 percent and will be raised to 100 percent starting from the end of June 2019.

Meanwhile, the liquidity mismatching rate is a monitoring indicator for now and will not become a regulatory indicator until Jan 1, 2020, the regulator said.

The current liquidity risk management measures for commercial banks were issued in 2014 and revised in September 2015, changing the loan-to-deposit ratio from a regulatory indicator into a monitoring indicator.