Malaysia unveils bank funding rules amid squeeze on liquidity

[KUALA LUMPUR] Malaysia's central bank has unveiled new rules governing the way local banks should account for certain deposits and other items on their balance sheets, in a move that may ease the recent squeeze in the ringgit money market.

Deposits which are subject to an early-withdrawal penalty of at least 50 per cent of accrued interest can be treated as "qualifying term funding," or money that can be lent out, with effect from June 1, according to a central bank circular dated Jan 30 and obtained by Bloomberg News.

Unrestricted investment accounts, which hold assets such as securities and exchange-traded commodities, will be subject to a 10 per cent run-off rate from the same date, the circular said. The run-off rate is the accounting treatment banks use to reflect the risk that the holders withdraw their funds.

Malaysian interbank rates have been rising recently amid uncertainty about the capital buffers that banks will have to hold in the run up to the introduction of strict new capital- adequacy ratios in 2019.

The three-month Kuala Lumpur interbank offered rate, a gauge of funding availability, reached 3.87 per cent on Dec 15, the highest since 2006. It was last offered at 3.84 per cent.

"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 per cent allowed as qualifying term funding in 2019, the circular said.

The Basel Committee on Banking Supervision issued rules in 2010 intended to boost banks' capital-adequacy ratios and give them an extra buffer against losses, following the global financial crisis that erupted in 2008. The so-called Basel III standards will be introduced in 2019.

The Malaysian central bank circular said non-ringgit denominated corporate bonds that have been assigned an A rating will be recognized as high-quality liquid assets subject to losses of 50 percent, effective from June 1.

BLOOMBERG