Risk & Compliance

Basel Committee Relaxes Bank Funding Rule

Global banking regulators want to take some of the sting out of the net stable funding ratio.
Vincent RyanOctober 9, 2017

The net stable funding ratio was supposed to make very large banks safer to deal with in the wake of the liquidity problems encountered during the financial crisis. The more stable a bank’s funding sources, presumably, the more resistant it might be to financial crash, making it a safer counterparty.

But now, on the eve of the rule’s implementation date, global banking regulators are looking to make compliance with the net stable funding ratio (NSFR) a little easier.

On October 6, the Basel Committee on Banking Supervision announced that it was introducing some wiggle room into the NSFR by allowing for a lighter treatment of derivative liabilities.

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The original rule assigned a 20% “required stable funding” factor to derivative liabilities. But last Friday the Basel Committee announced that, at national discretion, jurisdictions may lower the value of this factor, with a floor of 5%.

The NSFR measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded. Stable funding sources include customer deposits and long-term wholesale funding.

The ratio also measures the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.

Derivatives market participants had complained that the NSFR as proposed would have placed a huge funding requirement on derivatives activities.

An impact study conducted by the International Swaps and Derivatives Association and Global Financial Markets Association estimated the 20% factor alone would force dealers to raise $386 billion in stable funding.

The Federal Reserve has proposed alternative methodologies to replace the 20% factor, and the U.S. Treasury Department has called for a delay in implementation until the NSFR is “appropriately calibrated and assessed” to avoid unnecessary capital and liquidity requirements.