The Central Bank of Kenya (CBK) has asked commercial banks to raise their share of cash or liquid assets to enable them to respond to mass and panic withdrawals by customers for at least 30 days.
New guidelines on short-term liquidity issued by the banking regulator require banks to raise their available cash above the current requirement of 20 percent of their deposits to withstand a sudden and severe run.
Commercial banks will be expected to estimate the level of withdrawal requests possible from customers over a 30-day period in a shock scenario and keep an equivalent value of highly liquid assets such as cash, Treasury bills and corporate bonds to cover the outflows.
The new guidelines come amid speculation on social media of lenders placing curbs on withdrawals on alleged cash crunch in the economy.
The CBK has dismissed the rumours, terming any talk of instability in the banking erroneous.
“The banking sector in Kenya remains stable and resilient and is adequately capitalised. The intent behind these malicious attempts is usually to induce panic, leading to action which may destabilise the market,” CBK said in a statement on November 13.
Banking sector analysts reckon the release of the guidelines are not linked to the social media rumours, adding that the CBK had been working on the rules for months.
"In my view, it is more of a coincidence rather than a response to the statement (concerns for the banking system seen on various medium). The apex bank has issued these guidelines as part of Kenya’s continued move to Basel III, an ongoing process,” said Melody Ndanu, a Research Associate (Banking) at Standard Investment Bank (SIB).
Basel III refers to a set of international banking regulations, aimed at strengthening the supervision, risk management and the regulation of banks and that apply to internationally active lenders.
"The objectivity of the liquidity coverage ratio is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately into cash to meet their liquidity needs for a 30-day calendar day liquidity stress scenario,” say the new CBK guidelines.
“The LCR (liquidity coverage ratio) will improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.”
Local banks will be required to keep a high level of freely available cash or near cash or liquid assets, allowing them to withstand unexpected demand for withdrawals by customers up to a minimum of 30 days.
The buffer is expected to allow the CBK and a distressed bank time to work out ways of saving it from total collapse.
Currently, a commercial bank is required to maintain a statutory minimum of 20 percent of all its deposit liabilities, matured and short-term liabilities in liquid assets.
Bank liquid assets include reserves held both at its vaults and at the CBK and short-dated government securities such as Treasury bills, which are easily converted into cash.
The banking industry has on average exceeded its liquidity requirement having ended 2023 at a ratio of 51 percent, twice over the 20 percent statutory requirement.
Experts reckon the ratio does not adequately assess their abilities to withstand a sudden and severe run.
The CBK received technical assistance from the International Monetary Fund (IMF) between June 7 and 15 last year to strengthen the banking sector and help the apex bank transition to the Besel III regulations.
The Basel III rules were recommended first in 2013 by the Bank for International Settlements (BIS) and are the product of the 2008 financial crisis that saw a number of banks go under as others relied on State bailouts.
The liquidity requirements are part of the Basel regime that requires global banks to have at least enough assets that can be easily sold — such as central bank deposits — to cover 30 days of net cash outflows during a hypothetical stressed scenario.
The global rules were, however, tested following last year’s collapse of Silicon Valley Bank and rescue of Credit Suisse.
Credit Suisse comfortably met this requirement until shortly before customers pulled out almost a quarter of its assets in only a few days and pushed it to the brink of collapse.
The bank turned out to be unable to sell many assets it had identified to cover this requirement either because they were reserved for other purposes, such as daily liquidity needs, or because they were difficult to transfer to the entity where they were needed.
The speed of the upheaval that swept through the banking sector last year left regulators questioning whether the rules they agreed to shore up the sector after the 2008 financial crisis were working as intended and if they needed improving.
Kenya experienced a banking crisis in the 1990s that triggered the collapse of a string of banks.
The calm and resilient banking system was again tested in 2016 when the CBK placed three lenders-- Dubai Bank, Imperial Bank and Chase Bank—in receivership in a span of nine months, raising concerns about the country’s banking sector.
The strong capital and liquidity buffers recorded by the industry alongside the existence of a deposit insurance scheme under the Kenya Deposit Insurance Corporation (KDIC), which has secured funds in 99 percent of accounts in Kenya, is seen as a sufficient safety net to any bank liquidity concerns.
“I believe there should not be any concerns as most banks, especially the large Tier 1 banks have ample liquidity well above the minimum threshold of 20 percent Additionally, Kenya has legislation around deposit protection, which protects depositors up to a certain limit, providing an additional layer of security,” added Ms Ndanu.
