REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions as regards requirements for securities financing transactions under the net stable funding ratio
The NSFR standard was implemented in EU law on 20 May 2019 through an amendment of the Capital Requirements Regulation (CRR2). The related requirements entered into application at the end of June 2021. In its proposal amending the CRR, published on 23 November 20163, the Commission suggested the permanent use of RSF levels lower than those included in the Basel accord. The Commission concluded at the time that ‘it seems reasonable to bring limited changes to the treatment of both short-term transactions with financial institutions, and of HQLA Level 1 [in order] not to hinder the good functioning of EU financial and repo markets’. The arguments and analysis that led to this approach and the impact assessment accompanying the Commission proposal are still valid.
The co-legislators, however, allowed for a transitional 0% RSF requirement – instead of the 10% RSF specified in the Basel III standards and the lower one (5%) proposed by the Commission – for monies due from SFTs with maturities up to six months, when collateralised with Level 1 High Quality Liquid Assets (HQLA)5, such as sovereign debt. This provision is set to expire in June 2025, when the non-zero RSF requirement set out in the Basel standard would start to apply. The transitional provision aimed to give banks sufficient time to adapt to the more conservative requirement imposed by the Basel standards and to mitigate any consequential effect on the EU capital market, and in particular on the sovereign debt market.
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The United States, the United Kingdom, Japan and Switzerland have adopted a similar treatment as the EU’s transitional treatment, but these countries have made it a permanent one. The US agencies argue that ‘the 0% RSF factor assignment was made based on the determination that Level 1 HQLA pose minimal liquidity risk and contribute importantly to the good functioning of short-term funding markets, i.e. that a non-zero RSF factor on Level 1 HQLA could discourage intermediation in US Treasury and repo markets’.
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To avoid possible unintended consequences on capital markets liquidity and considering the safeguards provided by the current framework for banks, the Commission proposes to maintain the transitional treatment for monies due from SFT and for unsecured transactions with a residual maturity of less than six months, with financial customers. In addition to the ongoing monitoring of capital market developments by central banks and to the ongoing supervision by competent authorities, the Commission also proposes to mandate the EBA to report the impact of this treatment every 5 years. This would allow the Commission to act accordingly and propose amendments if evidence emerges from these periodic monitoring reports.
The full proposal is available here.