First take: Basel's final NSFR

November 2014

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Overview

On October 31st, the Basel Committee on Banking Supervision (BCBS) issued its final Net Stable Funding Ratio (NSFR), which was originally introduced by BCBS in 2010 and re-proposed in January 2014. The NSFR compares the amount of a firm’s available stable funding (ASF, the ratio’s numerator) to its required stable funding (RSF, the ratio’s denominator) to measure how the firm’s asset base is funded. The NSFR is seen by BCBS as a complement to its previously finalized Liquidity Coverage Ratio (LCR)–recently implemented in the US as a final rule–which is intended to promote short term resilience of a firm’s liquidity risk profile.

Overall, the final NSFR remains a fairly crude regulatory tool subject to measurement deficiencies (e.g., potentially imposing different liquidity requirements on practically identical repo transactions) and unintended consequences (e.g., higher transaction costs and instability in deposit markets due to increased demand for deposits that are deemed more stable under the final standard). Despite these weaknesses, and despite changes introduced in the final NSFR that make the standard somewhat more stringent, we expect compliance with the final standard to be manageable for most larger firms.

  1. The final NSFR is manageable.
  2. The final standard retains key changes favorable to the industry that were introduced in the January re-proposal.
  3. However, it is not all good news.
  4. Harsher treatment of reverse repos.
  5. BCBS engineers an alternative treatment for derivatives under the NSFR.
  6. Incorporation of off-balance sheet exposures creates more questions than answers.
  7. BCBS leaves the door open for improving the toughest measures introduced by the final NSFR.
  8. BCBS calls out national regulators’ shortcomings.
  9. US banks should expect to fully comply with both the NSFR and the LCR by January 1, 2018.
  10. US NSFR proposal now possible by mid-2015, final rule by 2015 year-end.

This First take elaborates on the key points above and discusses what's next.

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Dan Ryan
Banking and Capital Markets Leader
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Alison Gilmore
Asset and Wealth Management Marketing Leader
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