IMF published its staff report under the 2018 Article IV Consultation with Cambodia. Directors welcomed the policy efforts to safeguard financial sector stability. However, noting the elevated vulnerabilities, they stressed the need for additional targeted macro-prudential measures. They recommend that priority should be given to raising risk-weights for real estate lending, introducing a crisis management framework with a deposit insurance scheme, and continued upgrading of regulation and supervision.
The staff report highlights that financial sector vulnerabilities are elevated. The bank credit-to-GDP gap is expected to remain close to the BIS threshold of 10 percentage points. While banks’ capital adequacy has increased, vulnerabilities remain. Financial institutions continue to draw on external funding, suggesting liquidity risks as global financial conditions tighten, with the average loan-to-deposit ratio at around 100% in June 2018. Bank profitability declined, as interest margins fell and non-performing loans (NPLs) edged up. The true level of NPLs may still be understated. Furthermore, risks to the banking system have also increased due to the increasing household and corporate leverage. Despite the interest rate cap, which has increased the average loan size and may have pushed some borrowers to the informal sector, micro-finance institution (MFI) credit growth remains high at above 30%, adding to easy credit conditions.
The report notes that the authorities are taking welcome steps to safeguard financial stability. These include phased implementation of a capital conservation buffer, introduction of a liquidity risk management framework, improvements in loan classification of banks, and revisions to provisioning rules, to be implemented by 2019, when all banks should comply with International Financial Reporting Standards. Nevertheless, given the still elevated risks, additional prompt macro-prudential action is needed.
- Moderating the credit cycle. Priority should be given to targeted measures, such as raising risk-weights for real-estate-related lending commensurate with the risk profiles of banks.
- Enhancing regulation and supervision. Supervisory capacity remains stretched and the National Bank of Cambodia should consider limiting new banking licenses until capacity is sufficiently scaled up. The authorities should finalize and implement regulations on related-party lending and large exposures to align them with international best practice and conduct regular validation exercises to ensure accurate reporting. Capital adequacy regulations for risk-weight calculations need to be upgraded to ensure adequate capital buffers. The MFI interest rate cap should be phased out and MFI sectoral loan classification aligned with that for banks.
- Introducing a comprehensive crisis management framework. To better coordinate policies across government agencies and improve information-sharing, the authorities need to finalize the establishment of the national Financial Stability Committee. To help mitigate liquidity risks and bolster confidence, progress on introducing a deposit insurance scheme and a bank resolution framework should be expedited.
Related Link: Staff Report
Keywords: Asia Pacific, Cambodia, Banking, NPLs, Financial Stability, Article IV, IMF
Previous ArticleEBA Announces Date for Publication of Results of 2018 EU Stress Test
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.