Abstract
In Cambodia, the regulatory framework has not yet assigned a mandate for macroprudential policy to any institution. Furthermore, the macroprudential toolkit remains limited, with some of the available instruments not yet fully operational. A simple index to measure the macroprudential policy stance suggests that most measures have historically been loose, except for minimum reserve requirements in FX. Macroprudential polies remain loose, with all measures currently set below the neutral policies, except for the Liquidity Coverage Ratio (LCR).
Macroprudential Policies1
In Cambodia, the regulatory framework has not yet assigned a mandate for macroprudential policy to any institution. Furthermore, the macroprudential toolkit remains limited, with some of the available instruments not yet fully operational. A simple index to measure the macroprudential policy stance suggests that most measures have historically been loose, except for minimum reserve requirements in FX. Macroprudential polies remain loose, with all measures currently set below the neutral policies, except for the Liquidity Coverage Ratio (LCR).
1. The legal and regulatory framework has not assigned a mandate for macroprudential policy to any institutions. Nonetheless, the National Bank of Cambodia (NBC) established a Financial Stability Committee in 2011, chaired by the Deputy Governor, to monitor and assess financial stability, macroeconomic, and banking risks. Given the banking system is dominant, covering more than 80 percent of the financial sector in terms of assets, and the instruments are already available to the central bank, macroprudential policy is implicitly mandated to the central bank. A National Financial Stability Committee (NFSC) was established by the NBC, the Ministry of Economic and Finance, and Securities and Exchange Commission of Cambodia in August 2019. The NFSC is chaired by Prime Ministers to issue policies and crisis management measures to maintain financial stability.
2. The macroprudential toolkit is still limited. As of June 2022, the toolkit includes the capital conservation buffer (CCB), limits on foreign currency lending, the minimum liquidity coverage ratio (LCR), limits on net open foreign exchange positions, and minimum reserve requirements (RR) in FX and local currency. The enabling regulation for the counter-cyclical capital buffer (CCyB) has not been issued.
3. Furthermore, some of the existing instruments are used for other purposes rather than for preserving financial stability and mitigating systemic risk. For instance, reserve requirements are the main monetary policy tool. Since 2020, minimum reserve requirements have been the same in foreign and domestic currency, despite differences in liquidity risks (from a macroprudential standpoint, a differentiated calibration is typically warranted). A cap on FX lending was set at 90 percent in 2019 to help promote de-dollarization. All in all, the use and calibration of instruments according to other objectives curb the effectiveness of the macroprudential policies.
4. Other potentially relevant instruments for Cambodia could be considered. In particular, limits on the leverage ratio, stable funding requirements, household sector leverage limits (e.g. loan-to-value (LTV) and debt-service-to-income (DSTI) limits), and corporate sector instruments (e.g. caps on corporate credit by sector, sectoral risk weights) are lacking. The authorities have recently used the CCB as a shock absorber, for lack of a better instrument, delaying the full implementation of the CCB at the beginning of the pandemic (by keeping it at 1.25 percent instead of adopting the 2.5 percent 2020 regulatory target).
5. A simple macroprudential policy index suggests that the macroprudential policy (MPP) stance has been loose for most of the past decade. This note proposes a simple index (denoted as IMPP) to measure the macroprudential policy stance in Cambodia. For each macroprudential policy i, a neutral policy
The macroprudential stance is currently loose, with all measures currently set below the neutral policies, except for the LCR (text figure). In addition, no bank has made use of the allowance with respect to the CCB, as they have used the forbearance on loan classifications extensively, suggesting there has been an abundance of support with respect to need. In the past decade, most measures have been loose, except for reserve requirements in FX, which were tightened for a brief period prior to the global financial crisis (and moderately tightened prior to the Covid-19 shock).
Cambodia: Macroprudential Policy Stance
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A004
Cambodia: Macroprudential Toolkit
Cambodia: Macroprudential Toolkit
| Tool | Description | |
|---|---|---|
| Countercyclical capital buffer | ✓ | The NBC may set the CCyB in the range of 0 percent to 2.5 percent of total RWAs, which will be specified in a separate instructional circular. Currently, the CCyB is 0 percent because the regulations on how to calibrate are missing. |
| Capital conservation buffer | ✓ | The CCB is set to 2.5 percent of total RWAs. A prakas in February 2018 requires commercial banks to add at least 50 percent of the buffer effective January 1, 2019, and fully implement effective January 1, 2020. Note that effective March 2020, because of Covid-19, the NBC has reversed the implementation of the CCB ratio by requiring banks to hold 50 percent of the buffer (the same as 2019) and wait to see the Covid-19 situation before reimplementing the full measure. |
| Other capital requirements | ⊠ | |
| Limits on leverage ratio | ⊠ | |
| Loan-loss provisioning | ⊠ | |
| Limits on credit growth | ⊠ | |
| Other loan restrictions | ||
| Exposure caps to particular industries or sectors | ⊠ | A cap on bank lending to the real estate sector, at 15 percent of bank loan portfolios, was set in June 2008 but removed in January 2009. |
| Limits on Foreign Currency Lending | ✓ | From December 2019, the NBC has required 10 percent of loans to be in riel. |
| Limits to loan-to-value ratios | ⊠ | |
| Limits to debt-service-to-income ratio or loan-to-income ratio | ⊠ | |
| Tax | ⊠ | |
| Limits to the loan-to-deposit ratio | ⊠ | |
| Liquidity Coverage Ratio | ✓ | As announced December 23, 2015, and effective September 1, 2016, deposit-taking corporations (including foreign branches) and microfinance institutions are required to meet the LCR requirement. The LCR sets minimum LCR requirements for deposit-taking banks and financial institutions. It aims at: promoting short-term resilience of As announced December 23, 2015, and effective September 1, 2016, deposit-taking corporations (including foreign branches) and microfinance institutions are required to meet the LCR requirement. The LCR sets minimum LCR requirements for deposit-taking banks and financial institutions. It aims at: promoting short-term resilience of each institution’s liquidity risk profile. Ensuring that each institution has an adequate stock of unencumbered liquid assets that can be converted to cash at no or little loss of value in markets, to meet its liquidity needs for a 30-day liquidity stress scenario. Ensuring that prompt corrective actions are taken by the institution’s management when the LCR potentially falls below the minimum requirement. The LCR has two components: LCR=Market value of the stock of eligible liquid assets/Total net cash outflows within 30 days≥100%. The LCR is being phased-in according to the following scheme: Effective September 1, 2016, an LCR of 60% was implemented. Effective September 1, 2017, the LCR increased to 70% from 60%. Effective September 1, 2018, the LCR increased to 80% from 70%. Effective June 1, 2019, the LCR increased to 90% from 80%. Effective January 1, 2020, the LCR will be increased to 100% from 90%. |
| Stable funding requirements | ⊠ | |
| Limits on net foreign exchange positions | ✓ | As announced August 27, 2007, and effective the date, banks and financial institutions must at all times maintain their net open position in foreign currencies in either any foreign currency or overall net open position in all foreign currencies, whether long or short, may not exceed 20% of banks’ and financial institutions’ net worth. The Prakas has the purpose of preventing banks’ and financial institutions’ foreign exchange risks. |
| Reserve requirements for macroprudential purposes | ||
| Aggregate | ✓ | Effective December 1993, deposit-taking corporations (including foreign branches), banks, and microfinance institutions are subject to the reserve requirement regulation. The objective of this measure is to mitigate liquidity risk and credit risk. Required reserves are calculated based on demand deposits, time deposits, foreign currency deposits, government deposits, and savings deposits. Assets that are allowed to be held as required reserves include the following: (1) bank reserves denominated in domestic currency; (2) bank reserves denominated in foreign currency; (3) reserve assets. Different reserve requirement rates are imposed across types of deposits, currencies, banks, and others. The levels of reserve requirement applied to domestic currency liabilities and foreign currency (US$) liabilities were 8% and 12.5%, respectively, as of 2016. Only the difference of 4.5% of reserves in foreign currency liabilities is remunerated, and the reserve requirement ratio is only applied to the outstanding stock of reserves. |
| Differentiated by currency | ✓ | Reserve requirement rates are differentiated between local and foreign currency. The levels of reserve requirement applied to local currency liabilities and foreign currency (US$) liabilities were 8% and 12.5%, respectively, as of 2016. Only the difference of 4.5% of reserves in foreign currency liabilities is remunerated, and the reserve requirement ratio is only applied to the outstanding stock of reserves. As noted, because of Covid-19, effective March 17, 2020, and April 1, 2020, the NBC temporarily reduced reserve requirement rate on KHR and foreign currency to 7% (from 8% and 12.5%) until further notice. Effective October 1, 2020, reserve requirement rate on foreign currency and KHR will remain at 7% until further notice. |
| Systemically important financial institutions | ⊠ | The NBC can require an increase in the solvency ratio up to 30% to institutions or groups that could represent significant threat to the depositors and to the financial system as a whole. |
Cambodia: Macroprudential Toolkit
| Tool | Description | |
|---|---|---|
| Countercyclical capital buffer | ✓ | The NBC may set the CCyB in the range of 0 percent to 2.5 percent of total RWAs, which will be specified in a separate instructional circular. Currently, the CCyB is 0 percent because the regulations on how to calibrate are missing. |
| Capital conservation buffer | ✓ | The CCB is set to 2.5 percent of total RWAs. A prakas in February 2018 requires commercial banks to add at least 50 percent of the buffer effective January 1, 2019, and fully implement effective January 1, 2020. Note that effective March 2020, because of Covid-19, the NBC has reversed the implementation of the CCB ratio by requiring banks to hold 50 percent of the buffer (the same as 2019) and wait to see the Covid-19 situation before reimplementing the full measure. |
| Other capital requirements | ⊠ | |
| Limits on leverage ratio | ⊠ | |
| Loan-loss provisioning | ⊠ | |
| Limits on credit growth | ⊠ | |
| Other loan restrictions | ||
| Exposure caps to particular industries or sectors | ⊠ | A cap on bank lending to the real estate sector, at 15 percent of bank loan portfolios, was set in June 2008 but removed in January 2009. |
| Limits on Foreign Currency Lending | ✓ | From December 2019, the NBC has required 10 percent of loans to be in riel. |
| Limits to loan-to-value ratios | ⊠ | |
| Limits to debt-service-to-income ratio or loan-to-income ratio | ⊠ | |
| Tax | ⊠ | |
| Limits to the loan-to-deposit ratio | ⊠ | |
| Liquidity Coverage Ratio | ✓ | As announced December 23, 2015, and effective September 1, 2016, deposit-taking corporations (including foreign branches) and microfinance institutions are required to meet the LCR requirement. The LCR sets minimum LCR requirements for deposit-taking banks and financial institutions. It aims at: promoting short-term resilience of As announced December 23, 2015, and effective September 1, 2016, deposit-taking corporations (including foreign branches) and microfinance institutions are required to meet the LCR requirement. The LCR sets minimum LCR requirements for deposit-taking banks and financial institutions. It aims at: promoting short-term resilience of each institution’s liquidity risk profile. Ensuring that each institution has an adequate stock of unencumbered liquid assets that can be converted to cash at no or little loss of value in markets, to meet its liquidity needs for a 30-day liquidity stress scenario. Ensuring that prompt corrective actions are taken by the institution’s management when the LCR potentially falls below the minimum requirement. The LCR has two components: LCR=Market value of the stock of eligible liquid assets/Total net cash outflows within 30 days≥100%. The LCR is being phased-in according to the following scheme: Effective September 1, 2016, an LCR of 60% was implemented. Effective September 1, 2017, the LCR increased to 70% from 60%. Effective September 1, 2018, the LCR increased to 80% from 70%. Effective June 1, 2019, the LCR increased to 90% from 80%. Effective January 1, 2020, the LCR will be increased to 100% from 90%. |
| Stable funding requirements | ⊠ | |
| Limits on net foreign exchange positions | ✓ | As announced August 27, 2007, and effective the date, banks and financial institutions must at all times maintain their net open position in foreign currencies in either any foreign currency or overall net open position in all foreign currencies, whether long or short, may not exceed 20% of banks’ and financial institutions’ net worth. The Prakas has the purpose of preventing banks’ and financial institutions’ foreign exchange risks. |
| Reserve requirements for macroprudential purposes | ||
| Aggregate | ✓ | Effective December 1993, deposit-taking corporations (including foreign branches), banks, and microfinance institutions are subject to the reserve requirement regulation. The objective of this measure is to mitigate liquidity risk and credit risk. Required reserves are calculated based on demand deposits, time deposits, foreign currency deposits, government deposits, and savings deposits. Assets that are allowed to be held as required reserves include the following: (1) bank reserves denominated in domestic currency; (2) bank reserves denominated in foreign currency; (3) reserve assets. Different reserve requirement rates are imposed across types of deposits, currencies, banks, and others. The levels of reserve requirement applied to domestic currency liabilities and foreign currency (US$) liabilities were 8% and 12.5%, respectively, as of 2016. Only the difference of 4.5% of reserves in foreign currency liabilities is remunerated, and the reserve requirement ratio is only applied to the outstanding stock of reserves. |
| Differentiated by currency | ✓ | Reserve requirement rates are differentiated between local and foreign currency. The levels of reserve requirement applied to local currency liabilities and foreign currency (US$) liabilities were 8% and 12.5%, respectively, as of 2016. Only the difference of 4.5% of reserves in foreign currency liabilities is remunerated, and the reserve requirement ratio is only applied to the outstanding stock of reserves. As noted, because of Covid-19, effective March 17, 2020, and April 1, 2020, the NBC temporarily reduced reserve requirement rate on KHR and foreign currency to 7% (from 8% and 12.5%) until further notice. Effective October 1, 2020, reserve requirement rate on foreign currency and KHR will remain at 7% until further notice. |
| Systemically important financial institutions | ⊠ | The NBC can require an increase in the solvency ratio up to 30% to institutions or groups that could represent significant threat to the depositors and to the financial system as a whole. |
Prepared by Juliana Araujo.
