[Detailed client memorandum to come.] Today, the Basel Committee proposed revisions to the Basel III net stable funding ratio (NSFR). The original version of the NSFR was published in December 2010.
Background: Part of the Basel III liquidity coverage ratio, the NSFR requires banking organizations to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. The NSFR is defined as the amount of available stable funding (ASF) relative to the amount of required stable funding (RSF). This ratio should be equal to at least 100% on an ongoing basis (see formula below). ASF refers to the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which remains one year. The amount of stable funding required of a banking organization is a function of the liquidity characteristics and residual maturities of its assets and off-balance sheet (OBS) exposures.
Compliance Timing: The Basel Committee stated that “[i]n line with the timeline specified in the 2010 publication of the [Basel III] liquidity [ ] framework, it remains the Committee’s intention that the NSFR, including any revisions, will become a minimum standard by 1 January 2018.”
High-level Overview of Key Changes: The Basel Committee provided the following high-level overview of certain key proposed changes to the original December 2010 version of the NSFR
Available Stable Funding (ASF)
Recognition of operational deposits
- Operational deposits were not recognised in the 2010 NSFR, and would have received a 0% ASF factor (except for operational deposits from non-financial corporates); all operational deposits have now been included in the category receiving a 50% ASF factor.
Clarification of secured funding treatment
- A distinction is no longer made between secured and unsecured funding for funding maturing in less than one year from non-financial corporate customers; both are given a 50% ASF factor; in the 2010 NSFR, only unsecured funding from non-financial corporates maturing in less than one year received a 50% ASF factor; by implication, secured funding from the same counterparties received a 0% ASF factor.
Higher ASF factors for stable non-maturity deposits and term deposits
- “Stable” non-maturity deposits and term deposits now receive a 95% ASF factor compared with a 90% ASF factor in the 2010 NSFR.
- “Less-stable” non-maturity and term deposits now receive a 90% ASF factor compared with an 80% ASF factor in the 2010 NSFR.
Additional granularity for liabilities with residual maturities of less than one year
- Some funding sources with a residual maturity of not less than six months and less than one year now receive a 50% ASF factor, compared with 0% ASF in the 2010 NSFR.
Required Stable Funding (RSF)
Greater consistency with LCR HQLA definitions
- Where applicable, references to Liquidity Coverage Ratio (LCR) definitions of Level 1, Level 2A and Level 2B assets have been added to ensure greater consistency and alignment across the two standards; these assets have now been assigned RSF factors without regard to residual maturity.
Lower RSF factors for unencumbered loans to retail and small business customers
- Unencumbered loans with a residual maturity of less than one year to retail and small business customers that do not qualify for a 35% or lower risk weight were lowered to a 50% RSF factor from an 85% RSF factor in the 2010 NSFR.
Higher RSF factors for loans to non-bank financial institutions and non-HQLA securities
- Non-renewable loans to non-bank financial institutions and non-HQLA securities with a residual maturity of less than one year did not require any stable funding in the 2010 NSFR, but have now been placed in the category requiring a 50% RSF factor.
Additional granularity and lower RSF factors for certain other non-HQLA
- Certain assets with risk weights greater than 35% under the Basel II Standardised Approach, including unencumbered performing loans with residual maturity of one year or greater, unencumbered non-HQLA securities not in default, physical traded commodities and exchange-traded equities have been moved to a category requiring an 85% RSF factor from a category requiring a 100% RSF factor in the 2010 NSFR.
Higher RSF for HQLAs encumbered for a period of six months or more and less than one year
- HQLA encumbered for a period of six months or more and less than one year were previously treated as unencumbered in the 2010 NSFR but have now been assigned a 50% RSF factor.
Higher RSF factor for interbank lending for a period of six months or more and less than one year
- Interbank lending for a period of six months or more and less than one year is now assigned a 50% RSF factor (compared with 0% in the 2010 NSFR) and is treated symmetrically on the funding side with a 50% ASF factor for interbank borrowing for a period of six months or more and less than one year.
Comments: Comments on the NSFR proposal are due on April 11, 2014.
Basel Committee, Basel III: the Net Stable Funding Ratio – consultative document (Jan. 2014) available here: http://www.bis.org/publ/bcbs271.pdf