Basel Committee finalises NSFR
31 October 2014 Basel
Image: Shutterstock
Securities finance professionals have been given a Halloween treat in the form of the finalised net stable funding ratio (NSFR).
The Basel Committee on Banking Supervision (BCBS) issued the final standard on 31 October, marking the end of its regulatory reform agenda.
The NSFR, a significant component of the Basel III reforms, requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. The BCBS wants it to become the minimum standard by 1 January 2018.
The final NSFR, which was first put forward in 2009, retains the structure of the January 2014 consultative proposal.
Key changes introduced in the final standard cover the required stable funding for short-term exposures to banks and other financial institutions, derivatives exposures, and assets posted as initial margin for derivative contracts.
It also recognises that, under strict conditions, certain asset and liability items are interdependent and can therefore be viewed as neutral in terms of the NSFR.
Giving his initial impressions of the final NFSR, Debevoise & Plimpton LLP counsel Lee Schneider said that Section 45, which covers the treatment of interdependent assets and liabilities, contains “potentially helpful language”.
He said: “This provision seems to give national supervisors some discretion to provide symmetrical treatment that could help when market participants do matchbook or conduit securities lending or repo.”
“The BCBS left it up to national supervisors in each case, so while they have provided some flexibility, it’s up to the national supervisors to utilise that flexibility. Depending on what each regulator does, that really will determine whether or not this is something that will be beneficial to securities finance transactions under NSFR.”
“While I would say this provides some hope of a fix to the problem that the draft NSFR created with the a-symmetrical treatment, it doesn’t provide the silver bullet that many of us were hoping for.”
Stefan Ingves, chairman of the Basel Committee, commented: “A key lesson from the crisis has been the need to prevent overreliance on short-term, volatile sources of funding. The NSFR does this by limiting the use of volatile short-term borrowings to fund illiquid assets.”
”In finalising the standard, the committee has essentially completed its regulatory reform agenda, undertaken to promote a more resilient banking sector following the financial crisis."
The Basel Committee on Banking Supervision (BCBS) issued the final standard on 31 October, marking the end of its regulatory reform agenda.
The NSFR, a significant component of the Basel III reforms, requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. The BCBS wants it to become the minimum standard by 1 January 2018.
The final NSFR, which was first put forward in 2009, retains the structure of the January 2014 consultative proposal.
Key changes introduced in the final standard cover the required stable funding for short-term exposures to banks and other financial institutions, derivatives exposures, and assets posted as initial margin for derivative contracts.
It also recognises that, under strict conditions, certain asset and liability items are interdependent and can therefore be viewed as neutral in terms of the NSFR.
Giving his initial impressions of the final NFSR, Debevoise & Plimpton LLP counsel Lee Schneider said that Section 45, which covers the treatment of interdependent assets and liabilities, contains “potentially helpful language”.
He said: “This provision seems to give national supervisors some discretion to provide symmetrical treatment that could help when market participants do matchbook or conduit securities lending or repo.”
“The BCBS left it up to national supervisors in each case, so while they have provided some flexibility, it’s up to the national supervisors to utilise that flexibility. Depending on what each regulator does, that really will determine whether or not this is something that will be beneficial to securities finance transactions under NSFR.”
“While I would say this provides some hope of a fix to the problem that the draft NSFR created with the a-symmetrical treatment, it doesn’t provide the silver bullet that many of us were hoping for.”
Stefan Ingves, chairman of the Basel Committee, commented: “A key lesson from the crisis has been the need to prevent overreliance on short-term, volatile sources of funding. The NSFR does this by limiting the use of volatile short-term borrowings to fund illiquid assets.”
”In finalising the standard, the committee has essentially completed its regulatory reform agenda, undertaken to promote a more resilient banking sector following the financial crisis."
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