BCBS Issues Final Net Stable Funding Ratio Standard
The Basel Committee on Banking Supervision (“BCBS” or “Basel Committee”) issued its final standard on October 31, 2014, requiring banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. Entitled Basel III: the net stable funding ratio (“NSFR” or “standard”), the global standard aims to reduce the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position, thereby potentially increasing the risk of its failure that, in turn, could lead to broader systemic stress. The NSFR is defined as the amount of “available stable funding” relative to the amount of “required stable funding.” Under the final standard, this ratio should be no less than 100 percent on an ongoing basis.
Available stable funding refers to the portion of capital and liabilities expected to be reliable over the one-year time horizon considered by the NSFR. The amount of stable funding required of a bank is a function of the liquidity characteristics and residual maturities of its assets and off-balance sheet exposures. The final standard retains the structure of the Basel Committee’s January 2014 consultative proposal, but includes the following key changes for the required stable funding of short-term exposures to banks and other financial institutions, derivatives exposures, and assets posted as initial margin for derivatives contracts:
Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets and the bank has the ability to freely rehypothecate the received collateral for the life of the loan will receive a 10 percent weighting, while all other unencumbered loans to financial institutions will receive a15 percent weighting;
NSFR derivative assets net of NSFR derivative liabilities, if the NSFR derivative assets exceed NSFR derivative liabilities, will received a 100 percent weighting; and
Cash, securities, or other assets posted as initial margin for derivative contracts and cash, or other assets, provided to contribute to the default fund of a central counterparty will receive an 85 percent weighting.
In addition, the final standard recognizes that, under certain strict conditions subject to the discretion of national supervisors, certain asset and liability items are interdependent and can therefore be viewed as neutral in terms of the NSFR.
The NSFR will become a minimum international standard by January 1, 2018.