The U.S. has finally advanced its version of Basel’s net stable funding ratio (NSFR) with a proposed rule that, while generally tracking the global framework, is like the U.S. liquidity coverage ratio (LCR) more stringent in several respects. Although the banking agencies have calculated a minimal shortfall they believe covered banks will easily make up by the rule’s effective date, the NSFR nonetheless will combine with numerous other capital and liquidity rules to redefine the way in which large banks engage in certain businesses (e.g., repos). As a result, the cumulative impact of the NSFR and other liquidity rules will likely make covered banks more resilient to idiosyncratic funding stress, but less active in key markets on which both financial-services firms and governments depend especially as rates rise, adversely affecting overall market liquidity. Like the global rule, the U.S. one requires banks over a one-year period to have a 100 percent ratio of available stable funds (ASF) to required stable funds (RSF), although this ratio may decline somewhat under stress if various requirements are also met. ASF are defined to favor core deposits, certain operational deposits, and high-quality liquid asset (HQLA) holdings, consuming balance-sheet capacity given the capital cost of these assets and creating other challenges despite the benefit to longer-term funding resilience. RSFs provide very favorable treatment for cash, excess reserves, and most HQLAs, but mandate ASF backstops for repos and certain other assets in ways that are sometimes at odds with ASF calculations and in several cases assume liquidity risk not generally accepted by industry experience. These NSFR requirements apply to all BHCs above $50 billion, but those below $250 billion come under a modified, less stringent ratio despite coverage under the overall operational and disclosure standards.
The full report is available to retainer clients. To find out how you can sign up for the service, click here.