September 05, 2024 (MLN): The Reserve Bank of India’s (RBI) recent proposal to raise run-off factors for internet and mobile banking accounts in calculating liquidity coverage ratios (LCR) reflects global regulatory differences in addressing financial stability risks from digitalization, such as heightened run risks, Fitch Ratings says.
The RBI in late July launched consultations on higher run-off factors for internet and mobile banking-enabled (IMB) deposit accounts for retail and small business clients used to calculate the LCR.
The run-off factor for IMB accounts, including those linked to India’s Unified Payments Interface (UPI) system, would be 5pp higher than for other accounts.
Fitch does not believe the RBI’s proposals to recalibrate the LCR would have a material impact on India’s banking sector.
It estimates that banks would have to increase their holdings of high-quality liquid assets (HQLA) moderately, but that this would have a limited impact on loan growth.
The proposals’ effect in mitigating bank-run risks would be constrained, as they focus on retail and small-business deposit outflow assumptions, rather than significant commercial and institutional deposits that are more confidence sensitive.
Nonetheless, funding and liquidity has long been a relative strength for Fitch-rated Indian banks.
Outside of India, few authorities have issued specific reform proposals yet to address the challenges posed by increasingly digitalised banking during liquidity stress situations.
These were highlighted during the rapid outflow of deposits from several US banks and Switzerland-based Credit Suisse in 1Q23, which led to the collapse of some lenders.
However, global bank regulators are discussing whether changes are warranted to liquidity regulation and supervision regimes, or to crisis management frameworks, in terms of the provision of liquidity and resolution tools.
Fitch believes minor adjustments to LCR calculations are unlikely to bridge the gap between current liquidity requirements and the sort of outflow stress seen in 1Q23, but officials from several major regulators have indicated that LCR run-off factors for large deposits not covered by guarantee mechanisms are being reviewed.
The head of the UK’s Prudential Regulation Authority has said that there was a question about whether outflow rates in the LCR were high enough, for example.
Meanwhile, in January 2024, the acting Comptroller of the Currency in the US recommended a new LCR that would cover liquidity stress over a five-day period, which would measure potential uninsured deposit outflows against pre-positioned discount window collateral and reserves.
The Swiss National Bank is among those that have supported a review of the LCR by the Basel Committee on Banking Supervision (BCBS).
New Swiss liquidity regulations that came into force in 2022 require systemically important banks to hold sufficient liquidity to cover their intraday requirements, as well as their liquidity needs during a stress scenario lasting more than 30 days, but failed to prevent the run on Credit Suisse.
The authorities plan to conclude a review of the effectiveness of the special liquidity requirements for such banks by end-2026.
Other expert bodies have suggested focusing on the crisis management regime.
The Group of Thirty, an international banking advisory body, for instance, has focused on enhancements to the process of lending to troubled banks via lender-of-last-resort facilities, rather than on the LCR and HQLA.
Fitch believes most authorities will wait for the BCBS to issue its views, before adopting specific approaches, but in the meantime will rely on tougher supervision, including stress testing, to address the additional risks posed to liquidity coverage by digitally enabled banking.
Forging a consensus to address the issue under the Basel Committee standard-setting process is likely to be challenging given different views among regulators on how to tackle such risks.
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Posted on: 2024-09-05T10:36:15+05:00
