The Basel Committee on Banking Supervision has released 48 comment letters in response to its consultative document, “Basel III: the Net Stable Funding Ratio,” published January 12, 2014. These letters illustrate how difficult the NSFR may be to implement in practice. Here are some choice selections.
BNY Mellon: Raise the available stable funding (ASF) ratio from 50% as proposed to 75%, reflecting the low outflow rate of stable banking deposits. This would make the numbers align with the Liquidity Coverage Ratio.
CME Group: to no one’s surprise, CME has asked for a clarification on the ASF factor for “derivatives payable net of derivatives receivable if payables are greater than receivables.” Currently the ASF is 0%. However, CME would like a distinction between derivatives cleared on a CCP vs. non-cleared derivatives. Boy, you’d think these guys would be happy winning the counterparty credit limit argument (no limit at present for CCPs), but noooo, they want everything their way now!
Deutsche Bank: an argument for a degree of less simplicity in order for greater calibration of the real risk of holdings. “Perhaps the most evident example of the danger ofoversimplification is where products with very different liquidity traits have been bundled into the same ASF and RSF categories. For example the broad category “loans to financial entities” captures a wide spectrum of different activities at 50% RSF for short term maturing assets. This is particularly noteworthy in the case of securities financing transactions where the collateral quality is not factored into the standard: a reverse repo transaction on an LCR level 1 government bond is as good as having the cash irrespective of the counterparty. In this context, a 50% term funding charge is extremely punitive. This type of trade is fully ‘self financing’. Where it can be shown that certain products have significantly different liquidity traits, we urge the Committee to implement a more sensitive treatment. This can be achieved without losing the appropriate simplicity.”
Goldman Sachs: concerned, as are other banks, about the lack of alignment between the NSFR and the LCR. They are also concerned about the funding implications of collateral: “In addition to being a valuable credit risk mitigation tool, rehypothecatable variation margin received from a derivative counterparty provides stable funding for the balance sheet receivable from that counterparty…. Variation margin received and posted should be reflected in the ASF and RSF, which is not under the Committee’s current proposal.”
The ICMA’s European Repo Council: substantial concerns on the viable of wholesale funding in the face of the current NSFR. “The ERC would expect the framework to distinguish between secured and unsecured lending arrangements… The ERC is supportive of the broader industry recommendation that in the case of secured loans of maturities of twelve months or less to non-bank entities, where the underlying securities are Level 1 HQLA, the appropriate RSF factor is 0%. For secured loans against all other underlying securities, the ERC supports the recommendation that an RSF factor be applied that is equal to the product of 50% and the RSF factor that would apply to the collateral if held by a bank as an unencumbered asset.” We expect to see more, and soon, from the ERC on this topic.
Japanese Bankers Association: The CCP for repo argument: “Based on the idea that transactions settled through CCP is safer than over-the-counter transactions with banks subject to prudential supervision, and taking into consideration the international movement toward centralised clearing, the application of an RSF factor to transactions settled through CCPs should be set of 0% in line with that of loans to banks subject to prudential supervision with a residual maturity of less than six months. The BCBS is requested to clarify that transactions settled through CCPs are included in the scope of Paragraph 29 (c).”
Standard and Poor’s: taking a very non-bank view, S&P sees the NSFR proposal as perhaps too lenient: “The revised proposal appears to us less stringent than the original proposal published in December 2010. We see a risk that its goal of establishing a minimum standard that extends to one year may not be achieved because the new proposal gives partial credit to wholesale funding sources that mature within six to 12 months.”