KUALA LUMPUR: Banks could see some easing of the requirement to build up their retail deposit base under a new Bank Negara Malaysia (BNM) ruling that governs the way local banks should account for certain deposits and other items on their balance sheet.

Bloomberg reported yesterday that the central bank, in a circular dated Jan 30, had unveiled new rules under which deposits which are subject to an early withdrawal penalty of at least 50% of accrued interest can be treated as “qualifying term funding”, or money that can be lent out, effective June 1.

“Unrestricted investment accounts, which hold assets such as securities and exchange-traded commodities, will be subject to a 10% run-off rate from the same date,” Bloomberg quoted the BNM circular as saying.

The run-off rate is the accounting treatment banks use to reflect the risk that the holders withdraw their funds.

“The changes are intended to facilitate a smooth transition to full implementation of the liquidity coverage ratio by 2019,” the central bank said in the circular.

“The rule on deposits will be tightened from that date, with only those subject to early withdrawal penalties of 100% allowed as qualifying term funding in 2019,” the circular said.

“Based on the new ruling, it seems that BNM is more lenient on items that can qualify as LCR (liquidity coverage ratio),” a senior banking analyst told The Edge Financial Daily yesterday.

“The competition for retail deposits is to a large extent driven by LCR rollout as banks need to keep liquid assets to cover outflows for a certain period.

“Basically, banks need to keep sufficient liquidity in case of a bank run. With this new ruling, by allowing more items that can qualify as high quality liquid assets, it will ease pressure on banks needing to build up their retail deposits.

“This should also ease deposit competition and help take pressure off banks’ net interest margins (NIMs),” the analyst said.

“With this new change, it should improve our NIMs ... that of course would happen if everything else remains the same and banks don’t decrease their lending rates,” said a senior banker with a local banking group.

A managing director with another banking group, however, reckoned that the impact will not be overly positive as there is a “compensating factor”.  

“On one hand, the statutory reserve will be part of the LCR and that will give us more money to lend out thereby helping with our NIMs. However, we also have to provide more on the corporate portfolio for the run-off rate (how much cash may run off),” he told The Edge Financial Daily.

“So, this could net each other off. But it will depend on how much a bank provides on its corporate portfolio based on its respective modelling. Different banks will have different outcomes,” he said.

To recap, BNM has committed itself to standards set under Basel III, a global regulatory framework on banks’ capital adequacy, stress testing and market liquidity. It has targeted to implement the Basel III standards gradually between 2013 and 2019.

Under the Basel III LCR standard, banking institutions should hold sufficient high quality liquid resources to survive an acute stress scenario lasting a month.

Bloomberg reported BNM as saying that the new rules stipulated in the circular are part of the central bank’s effort to assist banks to comply with the Basel III standards.

“The changes are intended to facilitate a smooth transition to full implementation of the LCR by 2019,” said BNM.

This article first appeared in The Edge Financial Daily, on February 10, 2015.