MB okays the adoption of NSFR for U/KBs

 

By Rose de la Cruz

 

Universal and commercial banks (U/KBs) will now have to adopt the Net Table Funding Ratio (NFSR), a measure on the stability of a bank to fund its liquidity needs over one year.

 

This new measure complements the Liquidity Coverage Ration (LCR) which covers a shorter period of over 30 days in which a bank shall hold sufficient high quality liquid assets (HQLAs) that can be easily converted into cash to service their liquidity requirements.

 

Both ratios are aimed at strengthening the ability of banks to withstand liquidity stress and promote resilience of the banking sector.

 

Recognizing the importance of proportionality in its supervision approach, the BSP requires only U/KBs and select types of U/KB subsidiaries to comply with the LCR and NSFR standards.

 

The smaller institutions comprising of stand-alone thrift banks, rural banks, cooperative banks, and quasi-banks (QBs) are subject to the Minimum Liquidity Ratio (MLR) requirement which better suits their simpler liquidity risk profile.

 

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 provides a view of liquidity requirements over one year.

 

Beginning 1 January 2019, the covered institutions shall maintain an NSFR of 100 percent on both solo and consolidated bases.

 

To ensure a smooth transition to this new prudential standard and to allow prompt assessment and calibration of the components of the NSFR, the BSP is adopting an observation period of six months from July 1 to 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.

 

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 NSFR is part of the Basel III reform package issued by the Basel Committee on Banking Supervision (BCBS). Over the years, the BSP has introduced various liquidity reforms to improve the banking sector’s ability to absorb liquidity stress thus, lessening the risk of spillover from the financial sector to the real economy.

 

These reforms include the revised guidelines on liquidity risk management for banks and QBs, followed by the introduction of the amended LCR framework and the MLR.

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