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Liquidity ratio
The sixth area relates to liquidity. The Bill introduces new
liquidity requirements to replace the present ones. These will put
authorized institutions in a better position to meet liabilities such as
customers and interbank deposits as they fall due.
There is a whole range of approaches to defining the liquidity
ratic. What is proposed is an improvement and at the same time a
simplification. In effect, it requires authorized institutions to maintain
"liquefiable assets" for all "qualifying liabilities", that is, liabilities
maturing or callable within one month, at a ratio of not less than 25%. The
definitions relating to "liquefiable assets", a term which takes into
account cash inflows expected to arise from the maturing of non-liquid
assets, and to "qualifying liabilities", are contained in the Fourth Schedule.
The sanctions in support of this requirement parallel those in the case of
the capital to risk assets ratio.
Let me emphasize that liquidity is not something that can be
regulated entirely through a technical ratio. The Bill supplements the
liquidity ratio by requiring institutions to seek the Commissioner's
approval before giving charges over more than 5% of its local assets. They
are also required to report to the Commissioner any civil proceedings
against them that could adversely affect their financial position. In
addition, in examining an institution's position, the Commissioner would
be concerned not only with its compliance with the ratio as defined, but
also with its overall liquidity profile. He may impose additional liquidity
requirements on any institution as necessary.
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