Whilst the LCR requires the calculation of a firm’s 30-day average net cash outflow (short-term funding), the NSFR takes a longer view. The last instalment of ‘A focus on regulation’ discussed the intricacies of the LCR, in this edition we examine the NSFR.
The goal of the NSFR is to ensure a more stable funding profile based on the maturity profile of assets – generally a year. It measures long-term assets which are funded by long-term, stable funding including customer deposits, long-term wholesale funding and Equity. It specifically excludes short-term wholesale funding.
The NSFR is defined as ’the amount of Available Stable Funding (ASF) relative to the amount of Required Stable Funding (RSF),’ and its calculation is summarised as: ASF / RSF. The result should be greater than or equal to 100%.
The ASF is the portion of capital and liabilities expected to be reliable over a year including the likelihood that a funding provider will withdraw its funding. It assigns each funding source to a category and weights them accordingly. This gives an indication of the likelihood of the assets staying in the bank during times of stress. For example, secured borrowing including term deposits with a maturity of one year or greater would receive an ASF factor of 100%. Liabilities without a stated maturity would have an ASF factor of 0%.
The RSF is measured based on the characteristics of the liquidity risk profile of an institution’s assets – and off balance sheet (OBS) exposures, including secured financing transactions. Each asset is assigned to an RSF category based on the liquidity risk profile. The parameters of each RSF category are meant to approximate the funding requirements of an asset because it couldn’t be sold or used as security to raise funds. So, central bank reserves and unencumbered loans / banknotes would be assigned a 0% RSF factor but assets that are encumbered for a period of a year or more would be assigned a 100% RSF factor.
The current NSFR adoption date is January 1, 2018 but the ratio is still in its consultation phase. Any feedback with regards the current NSFR calculation is requested to be sent to the Basel Committee by April 11, 2014.
Even though this ratio is not yet finalised, and the deadline is a long way off firms should start looking at the impact on their funding. With the increased cost of capital, businesses may choose not to engage in some types of lending but instead move towards advisory or financial market activities. Banks may need to re-capitalise. Firms without retail deposits may find the NSFR a challenging ratio to meet. The deadline may be a long time away, but it could take some time to adjust to the new measures.