Fitch Ratings says the Reserve Bank of India's (RBI) recent proposal to raise run-off factors for internet and mobile banking accounts in calculating liquidity coverage ratios (LCR) highlights global financial regulators' divergences on how to tackle the financial stability risks stemming from digitalization, including the amplification of run risks.
The RBI launched consultations in late July on higher run-off factors for internet and mobile banking-enabled (IMB) deposit accounts for retail and small business clients used to calculate the LCR. The run-off factor for IMB accounts, including those linked to India's Unified Payments Interface (UPI) system, would be 5pp higher than for other accounts.
"Fitch does not believe the RBI's proposals to recalibrate the LCR would have a material impact on India's banking sector. We estimate that banks would have to increase their holdings of high-quality liquid assets (HQLA) moderately, but this would have a limited impact on loan growth. The proposals' effect in mitigating bank-run risks would be constrained as they focus on retail and small-business deposit outflow assumptions rather than significant commercial and institutional deposits that are more confidence-sensitive. Nonetheless, funding and liquidity has long been a relative strength for Fitch-rated Indian banks," Fitch said in a statement.
Outside of India, few authorities have issued specific reform proposals to address the challenges of increasingly digitalized banking during liquidity stress situations. These were highlighted during the rapid outflow of deposits from several US banks and Switzerland-based Credit Suisse in 1Q23, which led to the collapse of some lenders.
However, global bank regulators are discussing whether changes are warranted to liquidity regulation and supervision regimes or crisis management frameworks in terms of the provision of liquidity and resolution tools.
Minor adjustments to LCR calculations will unlikely bridge the gap between current liquidity requirements and the outflow stress seen in 1Q23. Still, officials from several significant regulators have indicated that LCR run-off factors for large deposits not covered by guarantee mechanisms are being reviewed. The head of the UK's Prudential Regulation Authority has said there was a question about whether outflow rates in the LCR were high enough, for example.
Meanwhile, in January 2024, the acting Comptroller of the Currency in the US recommended a new LCR that would cover liquidity stress over a five-day period, which would measure potential uninsured deposit outflows against pre-positioned discount window collateral and reserves.
The Swiss National Bank has supported a review of the LCR by the Basel Committee on Banking Supervision (BCBS). New Swiss liquidity regulations that came into force in 2022 require systemically important banks to hold sufficient liquidity to cover their intraday requirements and their liquidity needs during a stress scenario lasting more than 30 days but failed to prevent the run on Credit Suisse.
The authorities plan to conclude a review of the effectiveness of the special liquidity requirements for such banks by the end of 2026.
Other expert bodies have suggested focusing on the crisis management regime. For instance, the Group of Thirty, an international banking advisory body, has focused on enhancing the lending process to troubled banks via lender-of-last-resort facilities rather than on the LCR and HQLA.
Fitch believes most authorities will wait for the BCBS to issue its views before adopting specific approaches. However, they will rely on tougher supervision, including stress testing, to address the additional risks posed to liquidity coverage by digitally enabled banking. Forging a consensus to address the issue under the Basel Committee standard-setting process is likely to take a lot of work, given regulators' different views on tackling such risks.
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