AxiomSL: NSFR challenges and implications
Posted: 1 November 2017 | Author: Wissam Elzeenni | Source: AxiomSL
The Net Stable Funding Ratio (NSFR) is one of Basel Committee on Baking Supervision’s (BCBS) key responses to the 2008 financial crisis. The crisis acted as a wake-up call for BCBS to reassess the functioning of global financial markets and the banking sector, forcing the Committee to take action for increasing the short and long term resilience in the banking sector.
To support its liquidity framework, the Committee has introduced two regulations for funding and liquidity that are created with mutual objectives. Accordingly, BCBS has developed the liquidity coverage ratio (LCR) and the NSFR. The NSFR ratio is calculated as the amount of available stable funding (ASF) divided by the amount of required stable funding (RSF). As the NSFR regulation comes into effect, the ratio should be greater than 100% on an ongoing basis, which means the banks will be obliged to have sufficient available funding for one year to meet their required funding.
Although the Basel Guidelines stipulate 1st of January 2018 as the date for the NSFR application, there has been some push backs in the EU and the US, as well as a number of other jurisdictions. There are wide-reaching concerns that the NSFR in its current form will have a costly and disproportionately beneficial effect across the industry.
Current challenges and implications
The NSFR standard presents a number of challenges and implications to the banking sector. Today, many banks are still unconvinced by the regulation due to its potential benefit-cost ratio. Already inundated with endless, supposedly complimentary regulatory requirements like the LCR, the leverage ratio and the stress testing exercises; financial institutions (FIs) are doubtful that the standard covers any new risk areas that are already not tackled by the other regulations. More generically, some FIs think the standard was rushed through to begin with, as they feel uncertain in terms of how the standard was calibrated and its real tangible purpose.
NSFR definitions and assumptions should be aligned with those outlined in the LCR, unless otherwise specified. However, we are currently observing multiple examples that reveal this alignment is presently not in place. For instance, treasury securities that are assumed to have 100% weight in the LCR, have an RSF factor of 5% in the NSFR, thus indicating 95% could be sold or repoed over one year.
Operational and technical aspects of having to report NSFR is yet another challenge for FIs globally. Given that the NSFR is a fairly new reporting standard, FIs will have to invest a lot of time and effort into sourcing and mapping the requested data, as well as managing and monitoring the entire process. Asset encumbrance reasons and periods have to be accounted for and cash flows need to be generated over the entire life-time of various instruments, taking into account multiple dimensions like currency, legal entities and business lines within the constraints of local jurisdictions.
The NSFR aims to set limits on banks’ maturity transformations and as a result, decrease over-reliance on short term funding by targeting more stable funding and align maturity characteristics of their various business activities. This can be quite hurtful for some banks as it directly affects the way they conduct business and probably their profitability. Potential repercussions on the overall economy have to be highlighted as well; with the NSFR theoretically disincentivising long term unsecured funding, access to funding by households and small to medium enterprises could either become restricted or more expensive, thus impacting economic growth.
How best to manage your implementation
While the implementation of the NSFR seems not due until 2019/2020 in the EU, it is crucial that banks are well prepared and understand how it could affect their businesses in order to prevent any unintended consequences, before the standard is finalised. Looking forward, some banks may think NSFR might not be required after all; we certainly do not think this is the case. Regulators are listening to the industry and are making amendments to help facilitate the implementation of the NSFR. Just at the beginning of October 2017, BCBS agreed to allow national discretion for the treatment of derivatives liabilities and the corresponding RSF factor being lowered up to a floor of 5%.
Banks will be expected to meet the NSFR requirement on an ongoing basis, which addresses the need for a strategic long term solution. AxiomSL monitors the regulations to ensure our clients are up to date. We deal with the end to end regulatory reporting and calculation of the NSFR all the way from data sourcing, calculations, reporting and finally submission to the regulator in the required format with the multi-jurisdictional capability.
Having had already implemented the NSFR for various clients globally, AxiomSL’s expertise-wide regulatory platform ensures a future proof solution for the FIs, providing seamless adaptability to any changes and updates. Clients are able to run stress scenarios and model different business models demonstrating how each will impact their NSFR ratio and make sure they remain compliant. AxiomSL’s strategic platform empowers FIs with its core NSFR solution values, including automation, transparency, integration with LCR, Additional Monitoring Metrics (AMM) and Asset Encumbrance (AE) frameworks by relying on a common Unified Data Model (UDM), whilst retaining flexibility and adaptability.
Click here to find out more about AxiomSL’s NSFR solution.