The Net Stable Funding Ratio (NSFR) in Securities Finance: How Ugly Is It?

Finadium
November 2016

Finadium reports are distributed primarily by subscription. If you are a research subscriber, please log in to download a copy of this report. Otherwise, please contact us at info@finadium.com.

The Net Stable Funding Ratio (NSFR) is a flawed metric; we are not the first to say this and we will not be the last. Since its introduction by the Basel Committee on Banking Supervision in October 2014, and in the US version of the rules, inconsistencies and potentially very negative consequences have been identified by both public and private reviewers. The fundamental problem of the NSFR is that by arbitrarily weighting certain activities and counterparties over others, regulators encourage banks to alter their business activities to the detriment of financial markets. There will be risk reduction, true, but at an excessive cost.

In this report, we provide a primer on the NSFR, the main arguments against it and likely implications for securities finance. We review whether the NSFR or the Leverage Ratio is the biggest gating factor for securities finance business. Lastly, we look at the evidence to see if central counterparties (CCPs) are likely to help banks mitigate the worst impacts of the NSFR.

This Executive Briefing has been written for all market professionals to understand what the NSFR is and its implications for securities finance activity both now and in the future.

This report is 16 pages with 3 exhibits.

TABLE OF CONTENTS
■ Executive Summary

■ Why the NSFR Is Messy Regulation
– The NSFR Methodology

■ Can Banks Meet the NSFR?

■ The NSFR, Securities Finance and Market Liquidity
– Will CCPs Change the End-Game?

■ About the Author

■ About Finadium