repackage the traditional risks related to mortgage out of the balance sheet of banks while providing newer means to handle the financing of the mortgage. these structured products were made available to a wide spectrum of investors across different jurisdictions allowing for new opportunities in a more diversified portfolio. unfortunately, mr. chairman, when mortgage defaults became prevalent, the same links that diversified risks to a broader web of stakeholders are precisely the very same links through which we find some contagion effect that is now reflected by the present difficulties. the role of information, mr. chairman, in all of these simply cannot be understated. when times are good, there is the overwhelming tendency to ride the bandwagon, oftentimes sacrificing the need to validate all information as prudence dictates. however, when times are bad, it is precisely the dearth of information that drives institutions and the general public towards panic. to see this in better detail, we begin with what is arguably one of the most followed market rate, the effective fed funds rate. soon after the onset of the new millennium, the effective fed funds rate was moving downwards, eventually reaching its lowest levels in the 3rd quarter of 2003. the low interest rate regime was intended to spur lending and indeed one sector that benefited was the mortgage markets. housing prices were experiencing a pronounced appreciation and the low interest rate regime served to further fuel a boom in mortgages. in ages past, banks simply took the tenor mismatch of short - term liabilities funding long - term assets such as mortgages. this business model however exposes the bank to considerable long - term risks. under the basel accord framework – the de facto international best practice for bank supervision – these risks must be mitigated by corresponding capital charges. it is the long - term nature of the mortgage that makes it relatively “ expensive ” to maintain from the standpoint of allocating a fixed amount of bank capital. the process of securitization offers an alternative since us financial institutions could take out much of the traditional mortgage - related risks from their balance sheet. essentially, this is what occurred as housing equity loans ( hels ) were securitized, providing fis both fresh funds and balance sheet leeway to extend new loans, particularly mortgages. the securitized hels became what is referred to as mortgage - backed securities ( mbs ) and, with further structuring, eventually fed into another instrument which is called collateralized debt obligations or cd

we have also enhanced the reporting governance of banks. we have seen significant progress in the adoption of basel iii reforms, particularly in the areas of capital, leverage, liquidity and regulation of systemically important banks. more recently, we have rolled out a four - phased program for liquidity risk management. the first phase, which was approved by the monetary board through circular no. 981, covers guidelines on liquidity risk management, including intraday liquidity. next in the pipeline are amendments to the lcr standard and issuance of the complementary minimum liquidity ratio ( mlr ), a simplified version of the lcr requirement for less complex financial institutions. third, we will issue guidelines implementing the net stable funding ratio ( nsfr ) standard to ensure that banks have adequate long - term stable funding. lastly, the bsp will issue intraday liquidity reporting guidelines to complement the qualitative intraday risk management guidelines under circular no. 981. in line with the upcoming full adoption of the philippine financial reporting standards financial instruments ( pfrs 9 ), a consultative document on the “ expected credit loss ” model was released. in 2014, bsp started preparing banks on the use of the expected loss methodology through circular no. 855. parallel to this, we will enhance the pillar 3 disclosure requirements for incorporation in banks ’ annual reports. the guidelines on accreditation of external auditors across sectors are also being reviewed. these reforms promote market discipline, transparency, and resiliency. financial market development part and parcel of our strategic policy reforms is to accelerate financial market development with particular focus on local currency debt and foreign exchange ( fx ) markets. we envision a more balanced financial ecosystem where the banking system is complemented by a deep and liquid capital market. this can support the long - term financing requirements of corporates and the government, particularly with the “ build, build, build ” program roll out. as you know, the bsp, in collaboration with the sec, dof and the bureau of the treasury ( btr ) is working on a package of initiatives to be rolled out in a sequenced approach to ensure smooth implementation. the reform agenda will officially start with the launch of the government securities repo program on november 27 2017, in coordination with industry associations. through nine waves of reforms since 2007, the bsp has undertaken measures to liberalize the foreign exchange ( fx ) market. currently, we are pursuing even more ambitious fx reforms aimed at deepening the fx market