The US federal banking regulators (the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency) recently issued a Notice of Proposed Rulemaking (NPRM) proposing a new regulation that would impose another liquidity requirement on large financial institutions. The net stable funding ratio, or NSFR, would require that covered banking organizations maintain a sufficient stable funding profile over a one year horizon, in order to reduce the liquidity risk of disruption in a banking organization’s regular funding sources. Comments are due on or before August 5, 2016.
The proposed regulation is derived from a recommendation of the Basel Committee of the Bank for International Settlements, which issues standards for bank supervision, and would be a companion regulation to the liquidity cover ratio (LCR), which requires large banking organizations to maintain sufficient high quality liquid assets to cover cash outflows during a 30 day liquidity stress scenario. We discussed the LCR in a previous blog post.
What banking organizations are covered? Bank holding companies, certain savings and loan companies, and depository institutions with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exchange exposure, and to their consolidated subsidiaries that are depository institutions with $10 billion or more in consolidated assets.
Bank holding companies and savings and loan holding companies without significant insurance or commercial operations with at least $50 billion in consolidated assets but less than $250 billion and less than $10 billion in total on-balance sheet foreign exchange exposure would be subject to a modified NSFR, proposed to be 70% of the full NSFR.
These thresholds and imposition of a modified rule are similar to the LCR thresholds.
The proposed rule would not apply to the US branches and agencies of non-US banks, nor to their US intermediate holding companies unless they independently met the $250 billion threshold.
What is required? Covered banking organizations would calculate a measure of the stability of its equity and liabilities over a one-year time horizon, called its “available stable funding” amount, or ASF. The ASF would need to be at least equal to a minimum level of stable funding based on the liquidity characteristics of its assets, derivatives exposure and commitments over that same one-year time horizon, called its “required stable funding” amount, or RSF. The NSFR would be the ratio of its ASF (numerator) to its RSF (denominator) amounts.
The proposed minimum NSFR would be set at 1.0 to be maintained on an ongoing basis.
How is the proposed ASF amount calculated? The ASF amount would be the sum of the value of each of its regulatory capital elements and liabilities multiplied by an ASF factor of zero to one hundred percent, depending on the extent to which each element or liability is considered to be stable funding over a one-year horizon. Regulatory capital elements and liabilities considered most stable would carry an ASF factor of 100%, whereas items considered less stable would be given an ASF factor ranging from 95% down to zero percent.
How is the proposed RSF amount calculated? Calculation of the RSF amount would be split between the covered banking organization’s derivative transactions and its non-derivative assets and commitments.
The RSF non-derivative component is the sum of the value of each asset and undrawn amount of its committed credit and liquidity facilities, multiplied by an RSF factor of zero to one hundred percent, depending upon its liquidity characteristics over a one year time horizon. Assets and commitments considered the most liquid would carry an RSF factor of zero percent, while assets and commitments considered less liquid would be given an RSF factor ranging from 5% up to 100%.
Generally, the covered banking organization’s proposed RSF derivative amount would be the sum of: (1) current value of its derivative assets and liabilities; (2) contributions and margin it posted to a central counterparty default fund in connection with its derivative transactions and (3) potential change in the value of its derivative transactions.
Calculation on a consolidated basis: The NSFR and its component elements would be calculated on a consolidated basis. However, a covered banking organization would be required to exclude from the ASF a consolidated subsidiary’s funding that could only be used to support that subsidiary. For example, state or federal law could restrict certain assets from being transferred out of that subsidiary.
Proposed disclosure requirements: Similar to what has been proposed for the LCR, covered banking organizations would be required to publicly disclose each quarter its NSFR and certain NSFR components.
Proposed effective date: January 1, 2018.
The NPRM commentary on the proposed rule notes that at this time, the staff of the banking regulators believe nearly all of the banking organizations subject to the full NSFR requirement, and all of the holding companies subject to the modified NSFR requirement, would meet the proposed requirements. The NPRM commentary also contains over 60 questions to consider when drafting comments in addition to welcoming comments on all aspects of the proposal.