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Banks in S'pore may face difficulties in meeting new liquidity rules

Analysts say banks in Singapore may face difficulties in meeting the new liquidity requirements that were announced on Tuesday.

SINGAPORE: Banks in Singapore may face difficulties in meeting the new liquidity requirements that were announced on Tuesday.

Analysts say they would have to hold more liquid, or safer assets, at a time when consumers are clamouring for higher returns on their deposits.

Come next January, the three local banks -- DBS, OCBC, and UOB -- will need to have a liquidity coverage ratio of 100 per cent for Sing-dollar liabilities.

This means that in the event of a crisis, like a bank run, they will have enough liquid assets to cover every dollar that is deposited. In addition, they will also need to hold liquid assets in foreign currencies.

Local banks will need to cover 60 per cent of their non-Sing-dollar liabilities. This will gradually increase to 100 per cent by 2019.

The new liquidity rules have been welcomed by most banks. But some analysts say the higher liquidity coverage ratios, as well as the tight deadlines to meet these ratios, could be a problem and dampen the growth of the banking sector.

"This dramatic adjustment of portfolios, government bonds, or anything that will give them access to liquidity or helps them shore up liquidity… is not going to be easy for any bank,” said Cyrus Daruwala, managing director of Asia Pacific at IDC Financial Insights.

“One thing for sure, it affects their positions in the market, and it affects their future growth, because with that stringent regulation and dos and don'ts, there is that much little that they can play with."

Foreign banks will also come under new liquidity requirements.

Those deemed to be systemically important -- meaning those with significant retail operations in Singapore -- will need to cover 100 per cent of their Sing-dollar liabilities and 50 per cent of foreign currency liabilities by January 2016.

"Given that Singapore's such a large trading centre for international currencies and foreign exchange trading, some of the foreign banks which have large foreign currency trading as part of their Singapore operations may particularly face some difficulties with the transition period," said Rajiv Biswas, Asia Pacific chief economist at IHS.

The tighter rules reflect global regulatory changes that have been made in the wake of the 2008 financial crisis but analysts say this puts the banks in a spot.

"Do we incentivise the bank, or do we message the bank saying, ‘I'm happy with smaller returns and smaller interest rates.’ And if the answer is no, on one hand, we the consumers are incentivising institutions to take that risk, on the other hand, we want our capital and our growth to be secure," said Mr Daruwala.

Still, with the new requirements in place, industry observers say when competition heats up, Singapore will be one jurisdiction depositors can feel secure in. 

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