RiskTech Forum

Wolters Kluwer: Managing NSFR By Matching Conversion Ratios

Posted: 1 September 2015  |  Source: Wolters Kluwer


The Net Stable Funding Ratio (NSFR), which is the Available Stable Funding (ASF) divided by the Required Stable Funding (RSF), will be effective from January 1, 2018 - with minimum requirement at 100% by the Basel Committee on Banking Supervision (BCBS)1. This is the key component of Basel 3, governing the long-term funding risk over one year under stress scenarios to prevent radical expansion and over reliance on shortterm funding. Prior to this, traditional liquidity measures, under Asset and Liability Management (ALM), were based on contractual maturity and thus unable to capture unexpected cash outflows in the stressed markets, such as during the financial crisis.

To follow this change, definition and assumptions of the NSFR arising from its new features will be elaborated in the first part of this report and management measures will be discussed in the second part.

In part A, the initial step is to analyze the rational and the formula, where both ASF and RSF can be expressed as the base times the conversion ratios. The former equals the subtotal of capital and liability multiplied by the ASF conversion ratios and the latter is the sum of assets and off balance sheet exposures (OBS) times those of the RSF. Since the NSFR bases are also the accounting balances, the next issue is to therefore sort out the determinants of the ASF and RSF conversion factors. It would be better to begin with the balance sheet category and analyze further by the influential factors, such as counterparty type, effective maturity and risk weight.

For ASF, a 100% conversion ratio is applicable for the capital or liability sustainable no less than one year, by contract or by the counterparty’s option when potentially unfavorable to the bank. Then, major determinant for liabilities or funding sustainable within one year will be the counterparty type. In the RSF side, 100% is for the assets encumbered no less than one year, non-current items and derivatives. After that, ratios of HQLA are by its level that is related to its cash convertibility. Finally, the contractual residual maturity is the primary consideration for the ratios of loan and non-HQLA security, then risk weight and counterparty type are also applicable for the loan.

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