CB relaxes high quality liquid asset requirement for banks

As a part of a slew of measures introduced by the Central Bank to provide reprieve to banks of their capital and liquidity requirements, they have been given the option to maintain slightly less high quality liquid assets from the current minimum. 

Accordingly, the Central Bank has allowed banks to maintain a minimum liquidity coverage ratio (LCR) of 90 percent up to September 30, 2022 from the current 100 percent requirement.  

LCR measures the amount of most liquid assets held by a bank, which is referred to in the banking parlance as high quality liquidity assets (HQLA) in comparison to the projected cash outflows in the next 30-day period. 
High quality liquid assets consist of cash, cash equivalents and what is invested in short-term securities. 

For instance, if a bank’s projected cash outflow in the next 30-day period is Rs.150 million and the bank has liquid assets or cash in hand worth Rs.200 million, its LCR works out to 133 percent. 

Under reporting requirements, the banks are required to calculate the LCR separately for their rupee assets as well for all currency assets. 

The requirement was phased in from 2015 as part of BASEL III regulations, which was brought in, in response to the banking sector meltdown that happened in the United States and in Europe due to the US mortgage crisis. 
This in effect is a liquidity requirement to ensure that banks hold sufficient liquidity to meet their short-term financial obligations during a crisis event. 

Sri Lanka’s banking sector is also undergoing some stress, specially after the economy experienced a hard landing in March this year, which sent shock waves across all sectors, causing  dollar liquidity shortages in the banking system the most. 

Banks conduct periodic stress tests to ensure that they comply with LCR requirements. 

While Sri Lanka’s banks are currently in compliance even with the original requirement, the latest reprieve on the ratio came expecting potential stress on their liquidity, specially from their foreign currency operations.

Meanwhile, banks also have another well established liquid asset parameter measured through Statutory Liquid Assets Ratio (SLAR), where the banks are required to maintain 20 percent of their assets in government securities.