New banking liquidity regulation for Panamanian Banks

New banking liquidity regulation was issued by the Superintendency whereby the provisions on liquidity risk management and the short-term liquidity coverage ratio are established.

The document is based on Basel III and will be effective as of July 2018 for all Panama Banks that operate with a general and international license.

Among the main aspects of the new banking liquidity regulation, we will found that the Panamanian banks must comply with senior management that will be responsible for developing and implementing the liquidity risk management strategy, in accordance with the bank’s risk tolerance.

This strategy should include specific policies for managing liquidity, such as the composition and maturity of assets and liabilities; the diversity and stability of funding sources; the liquidity management approach in different currencies, countries, business lines and legal entities; the intraday liquidity management approach; the assumptions about the liquidity of the assets and their capacity to be traded in the market and the liquidity needs under normal conditions, the repercussions on the liquidity of periods characterized by liquidity tensions, whose origin may reside in the entity itself, in the market or both.

According to the agreement, the senior management should closely monitor market trends and possible events that could pose substantial, unprecedented and complex problems in the management of liquidity risk, so that timely changes in the liquidity strategy can be made.

The bank must define and identify the liquidity risk to which it is exposed in all legal entities, branches, and subsidiaries of the jurisdictions in which it operates.

The liquidity needs of the bank and the sources of financing available to satisfy them depend significantly on its business model and product portfolio, the structure of the balance sheet and the profile of the cash flows resulting from its obligations on and off the balance sheet.

The bank should use a range of measurement instruments or indicators, considering that no single indicator can completely quantify liquidity risk.

To have a prospective view of your liquidity risk exposures, you must use indicators that evaluate the structure of the balance sheet and others that project the cash flows and future liquidity positions, taking into account the risks out of balance, which should incorporate the existing vulnerabilities, both in normal business conditions and in situations of stress, for different time horizons.

In addition, the bank should establish limits to the liquidity risk, in order to control its exposure and vulnerability to liquidity risk and review these limits and their corresponding reinforcement procedures.

Another aspect required by the agreement is that the bank must diversify the sources of financing available in the short, medium and long-term.

The diversification objectives should be part of the medium to long-term financing plans and be consistent with the budget and business planning processes.

On the other hand, the agreement establishes that the short-term liquidity coverage ratio (LCR) is defined by the quotient of two amounts. The first amount corresponds to the fund of liquid assets of high quality and the second corresponds to the net outflows of cash in 30 days.

Among the main assets of high quality, we find coins and banknotes, sight deposits with or without maturity period of no more than 30 days, that are in the Federal Reserve of the United States, Bank of International Settlements or any other financial institution of similar characteristics, authorized by the bank regulation institution.

The agreement also lists the net cash outflows within 30 days that are recognized for the calculation of liquidity.