Banks' liquidity within acceptable range
Published on: Wednesday, August 16, 2017
Kuala Lumpur: The funding and liquidity conditions of the commercial banks in Malaysia are within acceptable levels, said the Association of Banks in Malaysia (ABM).The association, which has 27 members comprising commercial banks currently operating in Malaysia, said the loan-to-deposit ratio (LDR) did not accurately reflect the funding and liquidity conditions of banks.Instead, indicators of liquidity risk such as liquidity coverage ratio (LCR), loan-to-fund ratio (LTF), as well as loan-to-fund-and-equity ratio (LTFE) were better measurements of liquidity as they reflect the broader based funding of the banks, it said in a statement here yesterday.
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"It is important to note that misleading reporting on asset and liability positions may misrepresent the liquidity situation in the marketplace and may cause concern among the business community and the public," said AMB.ABM said this in reference to recent media reports on the LDR of Malaysian banks, which they said was worrying.The association said the increase in LDR of the banking sector had been driven by the anticipated moderation in deposits growth since 2011 but had remained relatively stable, hovering at between 86.7 per cent and 89.3 per cent over the last three years. "However, it is noted that the LDR is a simplistic measure which does not take into account the increased sophistication by banks in Malaysia to diversify their sources of funding beyond the deposit and interbank markets to include bond and equity and other financial instruments available to them," said ABM.
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In addition, the inherent limitations in the use of the LDR in today's environment include the assumption that deposits are stable, and that chunky, illiquid loans form the main bulk of the banks' assets. "The use of LDR as a measure of the banks' liquidity has become less relevant in light of the developments in the financial system over the last 10 years or so," said ABM.
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It said since the mid-2000s, the proliferation of alternative investment products available to the average consumer, coupled with lower savings and higher consumer activism, had reduced the relative stability of customer deposits. "This resulted in a shift to a broader funding base by the banks. While deposits remain as the main source of funding for Malaysian banks, the banking sector continues to raise medium-term funds to better manage maturity and currency mismatches," it said.To address the limitations of the LDR, the regulators have introduced the use of other indicators of liquidity risk such as the LCR, the LTF as well as the LTFE in 2015."The LTF and LTFE, available in Bank Negara Malaysia's Monthly Statistical Bulletin, are better measurements of liquidity as they reflect the broader based funding of the banks."The LTF includes issuances of debt securities in the denominator and gives a more comprehensive assessment of the banks' funding structure. The LTFE expands on this with the inclusion of equity," it said.The LCR standard, meanwhile, ensures that the banks have sufficient high-quality liquid assets that can be used to satisfy liquidity needs in a 30-day severe stress environment and considers a broader range of factors that can affect funding stability, such as the type of counter-party, transaction tenor and redemption features of a specific product.Stay up-to-date by following Daily Express’s Telegram channel.
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