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Financial institutions will be subject to stricter liquidity requirement.

Taipei, July 16, 2012 (CENS) -- The Financial Supervisory Commission (FSC) plans to follow the new version of Basel Capital Accord and introduce two new standards for the liquidity ratios of financial institutions, which will entail stricter definitions for qualified liquid assets. The practice will contribute to the stability of the domestic financial system but boost the funding cost of financial institutions, indirectly affecting corporate loans and fund raising.

The new liquidity-ratio standards will be incorporated into the supervisory observation index from next year and put into practice in 2015. Due to its extensive influence, the FSC has instructed Bankers Association to put forth evaluation report and suggestion in September.

Following the publication of new version of Basel Capital Accord, the FSC has actively reviewed the domestic regulations, with the aim of linking up with international practice. In addition to strengthening capital, the new capital accord also calls for enhancing banking liquidity. The FSC will coordinate with the Central Bank of China (CBC) to follow the requirement.

An FSC official expressed that due to undervaluation of banking assets and over-reliance on short-term funds, financial institutions suffered serious liquidity shortage during the global financial tsunami. Therefore, the new Basel Capital Accord puts forth two minimum liquidity standards, liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).

LCR regulates 30-day liquidity, while NSFR addresses liquidity-fund need within one year. LCR and NSFR have different definitions, including qualifications for securities for listing as liquid assets.

Compared with existing domestic regulations, the new Basel Capital Accord has stricter requirements for qualified liquid assets. The CBC, for instance, regulates that corporate bonds can be treated as liquid reserve assets but the new Basel Accord stipulates that corporate bonds must be discounted in being listed as liquid assets and corporate bonds without adequate credit rating are disqualified.

The new Basel Accord has stricter requirement for liquidity ratio, in the hope that financial institutions have sufficient liquidity to cope with emergent market situation, thereby boosting the stability of the financial system.

In order to prepare more liquidity reserves, banks, however, will have to spend more funds buying short-term highly liquid assets, which usually generate lower returns. The practice will reduce banking funds available for loans or other outlets capable generating higher returns. It, therefore, will enhance banks' funding cost and affect corporate loans indirectly.
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Author:Liu, Philip
Publication:The Taiwan Economic News
Geographic Code:9TAIW
Date:Jul 16, 2012
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