The Final Rule for the Net Stable Funding Ratio (“NSFR”) has been published by the Federal Reserve Bank (FRB), Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC). The final rule provides some insight as to the regulators’ approach to managing liquidity in the financial system and reveals there are changes coming for existing regulatory reporting.1

The NSFR was developed shortly after the 2008 financial crisis with the intent of increasing the level of longer-term, stable funding banks hold relative to their overall funding requirements. The ratio consists of available stable funding (“ASF”), a weighted measure of the stability of equity and liabilities over a one year horizon, and required stable funding (“RSF”), which is derived from the liquidity characteristics of a firm’s assets, derivative exposures and commitments over the same one year time horizon.2 The largest firms subject to the rule require a ratio of at least 1.0 when taking ASF as the numerator and RSF as the denominator.3 Figure 1 shows the breakout by bank category for NSFR application and weighting.

Figure 1. NSFR requirement by bank category4

Note: FBO categorization should be based on Intermediate Holding Company asset size and wSTWF and not combined US operations.5

The rule becomes effective July 1, 2021, with the first publicly disclosed submission due for Q1 and Q2 of 2023.6 The final rule makes several key changes to both the ASF and RSF as follows:

Available Stable Funding7:

  • Increase in weighting of non-deposit retail funding from 0 to 50 percent. A cited example of a product in scope was retail brokerage payables.
  • Affiliate sweep deposits are given more favorable treatment across the board. Affiliate sweep deposits that are assigned as 90 percent weighting now include deposits that are not insured. Additionally, certain fully insured affiliate sweeps can also be categorized at 95 percent weighting.

Required Stable Funding8:

  • Holdings of level 1 liquid assets now have a weighting of 0 percent and could not impact the denominator. This also applies to short-term lending transactions with financial sector counterparties secured by level 1 liquid assets where the weighting goes from 10 to 0 percent.
  • Calculation of the current net value component of a bank’s derivative assets and liabilities is updated to expand the types of variation margin eligible for netting and reducing the RSF amount related to the future value component.

Considerations and observations from final rule changes:

Regulators have delivered good news to industry participants:

The increase in application for affiliate sweep deposits for the ASF and the removal of impact of level 1 liquid asset holdings and transactions to the RSF are both favorable outcomes for industry participants and put less of a burden on staying compliant with the NSFR given current balance sheet construction. The regulators noted that, after receiving commentary and analysis on non-deposit retail liabilities, there was ample evidence of enhanced stability of sweep deposits placed by affiliates and updated the regulation to reflect this.9

For level 1 liquid asset holdings and financing, the regulators noted they do not want to discourage participants from engaging in key financial markets, potentially hampering the regulators ability to implement monetary policy.10 This insight shows the symbiotic relationship the regulators have with the capital markets participants and the renewed importance of level 1 assets to the financial system and liquidity.

Analysis from regulators indicate that the 20 in scope banks would largely comply with the requirements as of Q2 2020

In an analysis conducted using available data, the regulators created the NSFR for the 20 US Banks and FBOs in scope of reporting.11 Among these banks, there was an aggregate shortfall of stable funding of approximately $10 to $30 billion.  The banks could address this shortfall by shifting short-term commercial paper issuance to more stable, longer-term funding, at a total cost ranging from $80 to $250 million in total.

Overall, the 20 industry participants had a total surplus of stable funding of approximately $1.3 trillion, demonstrating a marked improvement on stable funding levels observed in the 2008 financial crisis. This highlights that only small shifts in balance sheet and funding profiles would be required for in-scope banks. Based on this financial analysis, it appears most of the impact of this rule would be driven by integrating the weighting changes into existing regulatory reporting capabilities and creating a production process for daily generation.

Changes outlined in the final rule could impact frequency of NSFR generation and updates are coming to the 2052a:

Previous drafts of the NSFR required the largest firms to produce the NSFR on a quarterly basis, using only quarter end data, a snapshot in time. This allows for relatively simple implementation of the report, not requiring daily generation. The final rule does two things of importance to the frequency of generation and submission: (1) firms should disclose their quarterly NSFR on a semi-annual basis and (2) instead of quarter-end data, firms should now submit their NSFR using simple daily averages for each calendar quarter.12 This requires daily generation of the NSFR in a standardized way for aggregation and averaging. The final communication from the regulators also note that the FRB plans on proposing changes to the FR 2052a to include reporting on NSFR data elements.13

Conclusion:

The finalization of the NSFR has been something the industry has been waiting for since its introduction post financial crisis. The final rule provided a reprieve for the banks that was not awarded without substantial effort and analysis. The upgrades to affiliate brokered deposits and treatment of level 1 liquid assets is expected to mitigate significant balance sheet changes and provide for a smooth transition to public reporting. Banks should consider the following actions over the coming months:

  1. Assess impact of quarter-end funding actions on ratios – The reporting on the daily average of NSFR can provide a different outcome for ASF and RSF numbers depending on how banks adjust their balance sheets for quarter end. If banks were tracking their compliance on quarter end numbers, an impact analysis should be done to understand what the NSFR looks like when these actions are not taken.
  2. Review existing NSFR creation and reporting capabilities – The change from quarter-end balances to a simple daily average requires a robust and automated NSFR generation process that allows for aggregation for reporting submission.
  3. Stay vigilant for changes coming to other regulatory reporting – As mentioned, the FRB could be updating its 2052a reporting to allow for the proper segmentation of data to run the NSFR from 2052a inputs.  Firms should assist to ensure any changes and segmentation being done to NSFR data should be shared or used for 2052a as well, to facilitate consistency and accuracy between reports.

To find out more on the topic or how Accenture can help in your NSFR implementation or planning, please contact the authors.

References

  1. “Final rule to implement a net stable funding ratio requirement for large banking organizations,” Memo, Board of Governors of the Federal Reserve System, October 20, 2020. Access at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201020b2.pdf.
  2. “Federal Register Notice: Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Board of Governors of the Federal Reserve System, October 20, 2020. Access at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201020b1.pdf.
  3. Ibid.
  4. Ibid.
  5. Ibid.
  6. Ibid.
  7. Ibid.
  8. Ibid.
  9. Ibid.
  10. Ibid.
  11. “Final rule to implement a net stable funding ratio requirement for large banking organizations,” Memo, Board of Governors of the Federal Reserve System, October 20, 2020. Access at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201020b2.pdf.
  12. “Federal Register Notice: Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Board of Governors of the Federal Reserve System, October 20, 2020. Access at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201020b1.pdf.
  13. Ibid.

 

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