By Lee C. Chipongian The Bangko Sentral ng Pilipinas (BSP) is adopting the net stable funding ratio (NSFR) for the country’s large banks to further strengthen its liquidity-related stress response and will begin an observation period on July 1. An observation period of six months will be implemented to allow the universal and commercial banks time to transition to the additional liquidity measure and to “allow prompt assessment and calibration of the components of the NSFR.” The observation period begins on July 1 until December 31, 2018. During this period, the covered institutions that will not meet the prescribed minimum ratio are required to submit a funding plan or actions that will be taken to improve their funding profile and comply with the requirement, according to the BSP. “Once the minimum ratio is implemented in 2019, breaches in the ratio will be dealt with using the tools in the BSP’s menu of supervisory enforcement framework taking into account the persistence and gravity of the breach.” The central bank explained that the NSFR “provides an indicator on the availability of funding for an institution’s activities represented by its assets and off-balance sheet exposures. It (also) provides a view of liquidity requirements over one year.” From January 1 next year, the big banks will be required a 100 percent NSFR on both solo and consolidated bases. As defined by the BSP, the NSFR measures a bank’s ability to fund its liquidity needs over one year. The NSFR is adopted to complement the liquidity coverage ratio which covers a shorter period of over 30 days in which a bank will hold sufficient high quality liquid assets that can be easily converted into cash to service their liquidity requirements, said the BSP.  These ratios strengthen banks’ ability to cope with liquidity stress. Thrift banks and rural banks as well as quasi banks, in the meantime, have their own minimum liquidity ratio for their simpler liquidity risk profile. The NSFR is the next step after the LCR was approved by the BSP in 2016 since it is the matching standards for the LCR. Both the NSFR and LCR complement the minimum capital adequacy requirements. The BSP explained earlier that while the capital adequacy ratio cover solvency issues and risks, the NSFR and LCR will protect banks against liquidity risks which may happen even if a bank is still solvent. The BSP is confident that big banks can readily comply with the new liquidity standards. Domestic banks have been under Basel 3 rules and standards since it was first adopted in January 1, 2014 by the BSP, one of the first adopters of the reform package in the region. Basel 3 or the Third Basel Accord was agreed upon by the Basel Committee on Banking Supervision which the Philippines is a member of. The agreements created the rules to ensure banks’ capital health and Basel 3 specifically is about increasing bank liquidity.