Tag Archives: CRR

The Net Stable Funding Ratio (NSFR) shall be implemented as a binding minimum ratio from 2018 on. It is defined as available stable funding (ASF) divided by required stable funding (RSF). Its supervisory monitoring started in 2014, according to European CRR-Regulation. Currently, the Basel Committee on Banking Supervisory revises it’s consultation on the final calibration of the NSFR dating from January 2014. Analysis suggests that National characteristics of Asset and Liability Markets matter and shall be taken into account defining a standardised ratio.

One goal of the NSFR is to allow for a better governance of liquidity risk stemming from maturity transformation of less than one year: Banks are required to hold an adequate portion of stable funding sources such as deposits or bond market financing, or even capital, instead of relying on short-term wholesale funding.

In addition to liquidity risk, the NSFR adresses the risk of increased leverage: Analysis shows that the increased leverage in the forefront of the Financial Crisis was often not financed by capital but by short-term wholesale funding. As the NSFR defines different levels of available and required stable funding, balance sheet growth is limited as long as it is based on non stable funding. For example, the available stable funding differs between regulatory capital which enjoys a 100 percent available stable funding (ASF) weight while stable non-maturity deposits receive a 95 percent ASF weight. In contrast, funding from a financial institution with residual maturity less than six months has a 0 percent ASF. Similarly, liquid assets enjoy lower required stable funding (RSF) factors while illiquid assets are assigned higher RSF factors.

This strong impact on asset liability management requires a careful calibration of the stability factors. As Gobat/Yanase/Maloney (IMF, WP/14/106) state, „changes in ASF and RSF factors for important asset and liability components make a substantial difference in the final NSFR figure, underlining the importance of having a proper calibration at the national level.“ One way to balance between the goal implementing a standardised single rule on European level and the flexibility required to take national characteristics into account, „is to allow for some “guided discretion,” particularly by allowing countries to apply more stringent parameters.“ For example „Supervisors will need to take a cautious approach in designing the deposit weights for the NSFR, as deposit stability characteristics will most likely vary among jurisdictions, depending on market and institutional factors.“

From March 31th on, banks will have to regularly report detailed components of the Liquidity Coverage Ratio and the Leverage Ratio. The final European rules shall be defined by the EU-Commission until June 30th. To address remaining issues a public hearing took place on March 10th. As expected, the EU Commission points to deviations from European CRR rules and tends to follow the international Basel3 rules, in line with the latest EBA recommendations.

Main take-aways are (see also stakeholder-paper_en):

For the Leverage Ratio, the EU-Commission seems to follow the EBA report issued on 4 March 2014. EBA emphasized that the analysis underlying their report has not indicated any EU specificities which would lead to recommend a divergence from the Basel rules text.

Three hours of the 4 hour meeting were reserved for the Liquidity Coverage Ratio. The EBA addressed main issues in its report dating from December 2013. Remaining questions, among others, concern the components of the liquidity buffer:

  • Shall Covered Bonds be Level 1 or/and Level 2 assets: The European Covered Bonds Council sketched that Covered Bonds have been more stable throughout the financial crises than other asset classes. It is also important to note that a classification to either L1 or L2 depending on the rating adversely impacts the comparability as European jurisdictions have different Covered Bond Regulations.
  • Shall the currently known standby Credit Facility of Central Banks be part of the liquidity buffer: There is strong evidence that contrary to the CRR regulations, the final LCR rules will not include these kind of facilities. Instead, priced facilities shall be used by Central Banks to better manage the liquidity flows, as suggested by EBA and BCBS.
  • Shall securitisations be part of the liquidity buffer: Up to now only RMBS are included. A controversial discussion concerning Automotive-ABS led to the following statements: First, the EU Commission indicated that this will be under review in the future. It shall be monitored together with new regulations of the European securitisation markets. Second, the EBA states that the pool of liquid assets has to be directly managed by a bank. In this sense, RMBS is an exemption, but it is in line with the Basel rules.

Finally, several indications given throughout the Public Hearing point to a limitation of Level 2/ High Quality Liquid Assets in line with the Basel rules (max 40% L2).