At least nine banks will require Sh68 billion to maintain the required regulatory liquidity threshold should the Treasury Single Account (TSA) be fully implemented this year and the Central Bank of Kenya (CBK) withhold its support, a new assessment by the apex shows.
TSA is a consolidated government cash account held at the Central Bank of Kenya, meaning all payments made to State agencies and departments will now be held at the apex bank.
A TSA is either one or a set of interlinked accounts that a government handles for the financial transactions of its ministries, departments and agencies (MDAs).
But the system, meant to cut administrative cost of running multiple accounts and boost accountability and transparency in public finances, could push several banks into a liquidity crisis by the end of this year if hurriedly implemented, the CBK has warned.
“The proposed implementation of the Treasury Single Account could impact negatively for some banks that hold large amounts of government-related deposits if this is done abruptly,” CBK said in the latest Financial Sector Stability report.
This assessment is based on a stress test that all commercial banks in the country were subjected to in May this year, to gauge their ability to withstand various shocks in the short-term.
In a scenario in which the TSA is fully implemented and the State Department and agencies withdraw all their deposits from banks, but the CBK continues to support the lenders’ liquidity, only six banks would fall below the liquidity requirement and would need Sh45.9 billion to bridge the gap.
But should the government fully implement the TSA transition and the CBK withhold any liquidity support, more banks would fall below the requirement as this would “leave government securities, customer deposits and borrowed as the main sources of liquidity” for banks, according to the CBK.
In this scenario, the apex bank said that the lender would require Sh68 billion to shore up their liquidity requirements.
Already, banks are facing declining liquidity, meaning many of them are increasingly finding it hard to meet their current liabilities from their available short-term assets, exposing them to risks of any shocks in the economy.
For instance, in its latest assessment, the CBK noted that banks are now turning to alternative funding sources, including deposits and balances due to foreign banking institutions and borrowed funds.
“The significant growth in other funding sources despite the steady growth in the customer deposits may indicate the volatility and short-term nature of the deposits that may not adequately fund long-term assets,” CBK said.
“It may also indicate that banks invested in long-term assets and therefore resorted to other sources of funding to bridge the maturity mismatches, especially during high interest rates.”
CBK requires lenders to have a liquidity ratio of at least 20 percent, and many of the lenders in the country are currently compliant, with the average ratio currently at 51 percent for all 39 banks.
However, with the withdrawal of government deposits in commercial banks, seven of the nine banks at risk will fall into a negative liquidity ratio, meaning their liquid assets will be far less compared to current liabilities and won’t be able to meet their short-term obligations.
The CBK did not disclose the specific banks that are currently at risk of liquidity challenges should the TSA be fully rolled out this year.