To prevent your brain from spiraling into something else in the aftermath of the unfortunate shooting incident in a public school in Tacloban, let me be clear that the MLR here does not refer to a muzzle-loading rifle.

Nope, Virginia, it does not refer to the Main Line of Resistance, either. Rather, it is the acronym for Minimum Liquidity Ratio (MLR) which, along with the Liquidity Coverage Ratio (LCR), stands among the most important financial barometers in banking.

Before I go any further, allow me to dig deep into the meaning of this banking alphabet soup.

LCR is a stringent, cash-outflow-based metric imposed primarily on universal (EKBs) and commercial banks (KBs). This Basel 3 framework requires EKBs and KBs to hold high-quality and easily convertible assets to cover expected net cash outflows.

On the other hand, MLR is a simplified stress test tailored for the "smaller brothers"—thrift, savings, rural, and cooperative banks. This requires them to hold eligible liquid assets representing a flat percentage, around 20 percent, of their total liabilities.

It is because of these two acronyms that the regulatory relief approved by the Bangko Sentral ng Pilipinas (BSP) Friday last week regarding hold-to-collect (HTC) assets becomes immaterial.

HTC is a classification for debt securities wherein banks hold assets to collect contractual cash flows. Moving a bank’s trading assets into the HTC category puts pressure on liquidity. It is limiting and altogether not considered a relief because of its lock-up effect.

That’s right, Virginia! Reclassification of peso-denominated GS (government securities) to HTC is not allowed under the relief, nor is the "waived mark-to-market requirements." Instead, it is a measure that applies solely to the computation of capital ratios.

The decision, as explained by BSP Deputy Governor for the Financial Supervision Sector Lyn I. Javier, was "guided by objective assessments of market conditions and potential systemic risks. This is to help banks manage their liquidity and profitability."

While the relief’s objective is upright, altruistic even—aimed to "mitigate undue market volatility and does not absolve institutions of accountability or shield them from underlying risks"—market perception changed altogether following the observation by Moody’s Ratings on Wednesday that it is "credit negative."

Reflecting on the adverse view of the credit watcher, senior bank executives' opinions point to a seeming reluctance toward the latest regulatory relief. They took the same stance as international watchers, calling it a "red flag."

To the minds of credit watchers, the regulatory respite could set a precedent for capital relief arising from external pressures like geopolitical tensions, and might incentivize banks to take on excessive duration or market risk moving forward.

One senior bank official believes that "this may compromise the entire banking system because the measure temporarily conceals the financial strain on bank balance sheets, as well as indicates underlying vulnerability to macroeconomic risks—namely interest rates and inflation rates."

Now, all things considered, is there a possibility for the BSP to enhance the regulatory relief by mandating the tenor of government securities that will be used to comply with the MLR?

If a financial institution struggles to satisfy the strict liquidity coverage tests required by the LCR and MLR, will the monetary authorities look into the possibility of requiring longer-term GS with a maximum of five years as the underlying assets for the MLR?

This is against the backdrop that 30 percent of the entire banking system’s assets are heavily invested in government IOUs, the value of which is influenced by fluctuating bond yields as well as inflation.

It is also built on the aspiration that volatility and fragility in the financial market will ease moving forward. Already, the latest developments indicate a narrowing/tightening of bond yields due to the 60-day Middle East ceasefire, dropping from a high of 150 basis points to 80 basis points.

As I've often said, let's see how this plays out.

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