The latest really big deal in big-bank regulation is the inter-agency proposal approved last week by the Federal Reserve to introduce the global net stable funding ratio (NSFR) in the U.S. The NSFR is tied to the already-final liquidity coverage ratio (LCR) to require big banks to hold enough stable funds over a year to prevent not just short-term liquidity freezes like the ones that toppled finance in 2008, but also longer-term funding mismatches that could so weaken a big bank that it dies a slow, costly death. Like the LCR, the NSFR will have significant implications not only on how big banks choose to fund themselves, but also on the assets they hold and the terms on which these are offered. The U.S. rule will, like Basel’s, have significant adverse implications for repos, including those involving the GSEs, continuing the long slide in big-bank repo activity with potentially significant and adverse impact on overall market liquidity. Like earlier global and U.S. liquidity rules, the NSFR also takes a dim view of securitization and mortgage-risk positions (including RMBS), adding now a similarly cautious view of long-term mortgages when these are housed on bank portfolios. Home-equity liens do, though, catch a break if they can be characterized as unconditionally cancellable.
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