Net Stable Funding Ratio

NSFR

Rabih Nehme
16-18 October 2022
Muscat
• Maturity transformation:
borrowing short-term funding & investing in assets with longer maturities.

• Liquidity Risk will exacerbated when:

• Relying on unstable funding sources (Short-term wholesale funding):
tend to dry up rapidly during periods of stress,

• Invest in long-dated illiquid assets

that cannot readily be converted to cash.

• Before LCR/NSFR:
maturity ladders and balance sheet ratios, such as the loan-to-deposit ratio.
 Net stable funding ratio
• Reduce the maturity mismatch between funding and business activities

• To ensure that banks fund their activities with sufficiently stable sources of
funding:
to mitigate the risk of future funding stress.

Uses with maturity > 1y. should be funded by means expected to be availabel for a period > 1y

• Mild idiosyncratic stress scenario:

- Decline in profitability and/or solvency
- Downgrade in credit rating
- Reputational event
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 Available Stable Funding (ASF)
≥ 100%
Required Stable Funding (RSF)

ASF
• Capital & liabilities expected to remain for
more than a year
• All Funding sources in 5 categories with
factors from 100% to 0%
• EX:
ASF 90% = 90% of this funding will remain
available for 1Y (10% not available).
RSF
• Stable funding required to hold for Assets & OBS
• Assets: liquidity characteristics & residual maturities
• OBS Exp: contingent liquidity risk
• Exposures into 8 RSF factors from 100% to 0%.
RSF 100%: illiquid exposure
needs to be entirely financed by stable funding
RSF 0% : most liquid assets,
assumed to be easily convertible to cash

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 NSFR Standard
• Int. agreed-upon definitions & calibrations
• Jurisdiction-specific conditions (national discretion)
• Definitions mirror those of LCR (HQLA, Retail…)
• Consolidated level, Quarterly, 1/1/2018

• Leverage ratio:
to limit build-up of excessive on- & off-
balance sheet bank leverage • NSFR: complements both objectives by:
limiting use volatile funding to purchase higher yielding
but less liquid assets
• LCR:
sufficient HQLAs to survive a 30-day
stress scenario
 ASF Calibration

• 5 factors: 100%, 95%, 90%, 50% and 0% (degree of stability of the funds)

• Categories driven by:

1. Funding Tenor
Longer-term liabilities/shorter residual maturity.
term deposit (> 1Y) will receive higher ASF factor compared to term deposit maturing in 6 months.

2. Funding Type and Counterparty

Retail deposits by small business more stable than wholesale funding with similar maturities.
 Long term Funding
1. Reg. Capital
• Except proportion of T2 inst. maturing in less than one year.

• Determined before the application of the reg. adjustments.

• Unqualified Inst. can be considered if maturity is at least one year.

• Inst. with embedded or explicit options:

if exercised, would reduce the expected maturity to less than one year cannot be included.
 Long term Funding
2. Liabilities with effective maturity of at least 1 year

• Secured and unsecured borrowing ≥ 1Y

• Term deposits maturing in 12 months (regardless size & nature of the depositor)

• Debt securities > 1Y

 Retail Deposits
• Demand deposits or < 1Y: (95%, 90%)
95% : 'stable deposits'
(5% assumed to be repaid in 1Y)
90% : 'less stable deposits'
(10% assumed to be repaid in 1Y)

• Natural person
• Small business, if:
• Loans to this small business managed as retail, & < EUR 1 million in total
• Similar liquidity risk characteristics to retail accounts
• Total funding (deposits & debt securities) < EUR 1 million
 Partially Stable Funding (ASF 50%)
• Funding from non-financial corporates < 1Y
term deposits, secured or unsecured loans, or securities issued by the bank

• operational deposit accounts

deposits generated by clearing, custody or cash management activities

• public sector funding < 1Y

funding received from sovereigns, PSEs and MDBs

• All other secured or unsecured funding matures in 6 to 12 months.

funding provided by central banks or financial institutions
 NSFR: Available Stable Funding
Tier 1 & 2 Capital Instruments

100% Other pref. shares & capital inst. in excess of T2C allowable amount with maturity ≥ 1yr

Other liabilities ≥ 1yr

95% Stable deposits of retail & small business customers (non-maturity or residual maturity > 1yr)

90% Less stable deposits of retail & small business customers (non-maturity or residual maturity < 1yr)

50% UWF provided by non-financial corporate customers (non-maturity or residual maturity < 1yr)

0% All other liabilities and equity not included above

UWF: Unsecured Wholesale Funding

 NSFR: Required amount of stable funding (Uses) (1)

• Coins and banknotes

• All central bank reserves
0% • All claims on central banks with residual maturities of less than six months
• “Trade date” receivables arising from sales of financial instruments, foreign
currencies and commodities.

• Unencumbered Level 1 assets, excluding coins, banknotes and central bank

5% reserves
• Unencumbered loans to financial institutions with residual maturities of less than
six months, where the loan is secured against Level 1 assets as defined in LCR
10% paragraph 50, and where the bank has the ability to freely rehypothecate the
received collateral for the life of the loan
• All other unencumbered loans to financial institutions with residual maturities of
15% less than six months not included in the above categories
• Unencumbered Level 2A assets
 NSFR: Required amount of stable funding (Uses) (2)

• Unencumbered Level 2B assets

• HQLA encumbered for a period of six months or more and less than one year
• Loans to financial institutions and central banks with residual maturities between
six months and less than one year
50% • Deposits held at other financial institutions for operational purposes
• All other assets not included in the above categories with residual maturity of less
than one year, including loans to non-financial corporate clients, loans to retail
and small business customers, and loans to sovereigns and PSEs

• Unencumbered residential mortgages with a residual maturity of one year or

more and with a risk weight of less than or equal to 35% under the Standardised
Approach
65% • Other unencumbered loans not included in the above categories, excluding loans
to financial institutions, with a residual maturity of one year or more and with a
risk weight of less than or equal to 35% under the standardised approach
 • Cash, securities or other assets posted as initial margin for derivative
contracts and cash or other assets provided to contribute to the default fund
of a CCP

• Other unencumbered performing loans with risk weights greater than 35%
under the standardised approach and residual maturities of one year or
85% more, excluding loans to financial institutions

• Unencumbered securities that are not in default and do not qualify as HQLA
with a remaining maturity of one year or more and exchange-traded equities

• Physical traded commodities, including gold

 • All assets that are encumbered for a period of one year or more

• NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative

assets are greater than NSFR derivative liabilities

• 20% of derivative liabilities

100%
• All other assets not included in the above categories, including non-
performing loans, loans to financial institutions with a residual maturity of
one year or more, non-exchange-traded equities, fixed assets, items
deducted from regulatory capital, retained interest, insurance assets,
subsidiary interests and defaulted securities
 NSFR: RSF Off –Balance Sheet

5% • Irrevocable and conditionally revocable credit and liquidity facilities to any client
of the currently undrawn portion

Other contingent funding obligations, including products and instruments such as:

• Unconditionally revocable credit and liquidity facilities

• Trade finance-related obligations (including guarantees and letters of credit)

National supervisors can
specify the RSF factors • Guarantees and letters of credit unrelated to trade finance obligations
based on their national
circumstances • Non-contractual obligations such as: − potential requests for debt repurchases of
the bank’s own debt or that of related conduits, securities investment vehicles
and other such financing facilities − structured products where customers
anticipate ready marketability, such as adjustable rate notes and variable rate
demand notes (VRDNs) − managed funds that are marketed with the objective of
maintaining a stable value
 Partially Stable Funding (ASF 50%)
• Funding from non-financial corporates < 1Y
term deposits, secured or unsecured loans, or securities issued by the bank

• operational deposit accounts

deposits generated by clearing, custody or cash management activities

• public sector funding < 1Y

funding received from sovereigns, PSEs and MDBs

• All other secured or unsecured funding matures in 6 to 12 months.

funding provided by central banks or financial institutions
 NSFR: Implementation issues

• Meeting the NSFR requirement on an ongoing basis

• NSFR Should be reported at least quarterly

• The time lag in reporting should not surpass the allowable time lag under
the Basel capital standards.
 NSFR: Implementation issues
• NSFR should be applied on a consolidated basis.

• Besides, liquidity risk exposures & funding needs should be monitored at

the level of:
• individual legal entities,
• foreign branches and subsidiaries, and
• the group as a whole,

• Banks should take into account legal, regulatory and operational

limitations to the transferability of liquidity