In late April 2016, several US financial agencies including the Board of Governors of the Federal Reserve System (FRB), Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed joint-rulemaking (NPR) that would implement a minimum net stable funding ratio (NSFR) requirement for large US banking organizations. 1

Federal Reserve Governor Daniel Tarullo noted, “the NSFR requirement is designed to reduce the likelihood that disruptions to a firm’s regular sources of funding will compromise its liquidity position.”2 The intent of the NSFR is to help identify covered companies that have a heightened liquidity risk profile and pose a greater risk to US financial stability.3 To accomplish its objectives, the NSFR would require stable funding over a one-year horizon. Specifically, covered companies would be required to maintain a minimum level of stable funding based on the liquidity characteristics of the covered company’s assets, funding commitment, and derivative exposures over a one-year horizon.4 The NSFR would be expressed as a ratio of Available Stable Funding (ASF) to Required Stable Funding (RSF), required to equal 1.5

The proposed NSFR is largely consistent with the NSFR adopted in October 2014 by the Basel Committee on Banking Supervision (BCBS) to reduce liquidity risk in the financial sector and provide a safer and more resilient financial system.6 Though the US NSFR proposed rule closely mirrors the BCBS NSFR final rule, the US requires a stricter reporting methodology and has more stringent requirements for RSF and ASF. The proposed NSFR would become effective January 1, 2018.  The comment period runs until August 5, 2016.

Overview of the Proposed Rule

The NPR outlines two requirements: (i) the full NSFR requirement and (ii) modified NSFR requirement depending on the size of the covered company.  The table below outlines key facts about each of the proposed requirements.

Figure 1: The scope of the Net Stable Funding Ratio requirement

Topic Full NSFR Modified NSFR
NPR Publication Date
  • OCC:  April 26, 2016
  • FDIC: April 26, 2016
  • FRB:  May 3, 2016
  • OCC:  April 26, 2016
  • FDIC: April 26, 2016
  • FRB:  May 3, 2016
Covered Companies
  • Bank holding companies, savings and loan holding companies without significant commercial or insurance operations, and depository institutions that have ≥ $250 billion in total consolidated assets or ≥ $10 billion in on-balance sheet foreign exposure
  • Depository institutions with ≥ $10 billion in total consolidated assets that are consolidated subsidiaries of such bank holding companies and savings and loan holding companies
  • Bank holding companies and savings and loan holding companies without significant insurance or commercial operations that have ≥ $50 billion, but < $250 billion in total consolidated assets and < $10 billion in total on-balance sheet foreign exposure
NSFR Requirements
  • The covered companies must cover 100% of their obligations
  • The covered companies must cover 70% of their obligations
Disclosure Requirements
  • Not applicable to Depository Institutions that are subject to the proposed rule7
  • Public disclosure in a standardized tabular format (NSFR disclosure template) on a quarterly basis8
  • Public disclosure in a standardized tabular format (NSFR disclosure template) on a quarterly basis
Comment Period End Date
  • August 5, 2016
  • August 5, 2016
Effective Date
  • Will become a minimum standard by January 1, 2018
  • Will become a minimum standard by January 1, 2018

Source:  Accenture Analysis based upon publicly available data

NSFR Requirements

The NSFR’s intent is to measure the stability of a covered company’s funding profile. The NSFR would equal the ratio of a covered company’s ASF amount to its RSF amount.9 The ASF, or Available Stable Funding, represents the numerator in the NSFR ratio and measures the stability of its regulatory capital elements and liabilities.10  The RSF, or Required Stable Funding, is the denominator of the NSFR ratio and consists of the liquidity characteristics of the covered company’s assets, derivative exposures, and commitments.11 The proposed rule would require a covered company to maintain a NSFR of at least 1 (100%) on an ongoing basis.12

 

NSFR Visual

Source:  Accenture Analysis

Available Stable Funding Amount (AFS)

The AFS would be required to equal or exceed the RSF amount.13 The AFS amount is equal to the sum of a covered company’s regulatory capital elements and liabilities, multiplied by an appropriate factor, as defined by the agencies for the capital element or liability.14 The prescribed AFS factors represent whether the regulatory capital element or liability is considered stable funding over the one-year horizon, accounting for the maturity of funding, as well as the type of funding and counterparty.  ASF factors are scaled from zero to 100 percent, with a rating of 100% reflecting the highest stability.15

The NSFR would have to be calculated on a consolidated basis.16 However, when calculating its consolidated ASF amount, a covered company would be required to account for certain restrictions on the ability of stable funding of a consolidated subsidiary to support assets, derivative exposures and commitments outside of the subsidiary.17 Restrictions may include, but are not limited to the available stable funding of the consolidated subsidiary to support assets, derivative exposures, and commitments of the covered company held at entities other than the subsidiary.18

Required Stable Funding Amount (RSF)

The RSF represents the sum of an RSF amount calculated for: (i) non-derivative assets and commitments; and (ii) an RSF amount calculated for derivative transactions.19

Notice Requirements

A. Shortfalls

A covered company would be required to notify its financial regulator, within 10 days, if a covered company fails to maintain a NSFR of 1 or greater.  The proposed rule would also require a covered company to develop and submit a plan for remediation.20

B. Disclosures

Bank holding companies or savings and loan holding companies subject to the full or modified NSFR requirement would have to publicly disclose their NSFR and enumerated components of their NSFR in a standardized format and on a quarterly basis.  The proposed disclosure requirements would not apply to depository institutions subject to the NSFR.21

Client Takeaways

Firms subject to the NSFR proposal should begin to consider how the NSFR proposal aligns to their broader regulatory compliance strategy. In particular, firms should examine the cross-border impacts NSFR will pose to their current businesses, and understand the potential overlap of domestic and international regulations.

In light of the short compliance timeframe, covered companies should consider assessing their current liquidity regulatory reporting capabilities against the NSFR proposal and begin to identify areas for improvement. Assessments of Technology and Data Architectures can assist firms to enhance their risk management framework by evaluating their ability to adequately support a steady risk management framework.

References

  1. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Federal Register: The Daily Journal of the United States, Proposed Rule, 81 Fed. Reg. 101, June 1, 2016. Access at: https://www.gpo.gov/fdsys/pkg/FR-2016-06-01/pdf/2016-11505.pdf.
  2. “Board vote on draft notice of proposed rulemaking to implement a net stable funding ratio requirement for large banking organizations,” Board of Governors of the Federal Reserve System, April 25, 2016. Access at: https://www.federalreserve.gov/aboutthefed/boardmeetings/nsfr-board-memo-20160503.pdf.
  3. Ibid.
  4. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Federal Register: The Daily Journal of the United States, Proposed Rule, 81 Fed. Reg. 101, June 1, 2016. Access at: https://www.gpo.gov/fdsys/pkg/FR-2016-06-01/pdf/2016-11505.pdf.
  5. Ibid.
  6. “Basel III: the net stable funding ratio,” Basel Committee on Banking Supervision, October 2014.  Access at: http://www.bis.org/bcbs/publ/d295.htm.
  7. The agencies note the potential for future development of a modified reporting form requirement for depository institutions and depository institution holding companies subject to the proposed rule.
  8. The NSFR template is similar to the common proposed template published by the BCBS as part of the Basel III Disclosure Standard.
  9. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Federal Register: The Daily Journal of the United States, Proposed Rule, 81 Fed. Reg. 101, June 1, 2016. Access at: https://www.gpo.gov/fdsys/pkg/FR-2016-06-01/pdf/2016-11505.pdf.
  10. Ibid.
  11. Ibid.
  12. “Board vote on draft notice of proposed rulemaking to implement a net stable funding ratio requirement for large banking organizations,” Board of Governors of the Federal Reserve System, April 25, 2015. Access at: https://www.federalreserve.gov/aboutthefed/boardmeetings/nsfr-board-memo-20160503.pdf.
  13. Ibid.
  14. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Federal Register: The Daily Journal of the United States, Proposed Rule, 81 Fed. Reg. 101, June 1, 2016. Access at: https://www.gpo.gov/fdsys/pkg/FR-2016-06-01/pdf/2016-11505.pdf.
  15. “Board vote on draft notice of proposed rulemaking to implement a net stable funding ratio requirement for large banking organizations,” Board of Governors of the Federal Reserve System, April 25, 2015. Access at: https://www.federalreserve.gov/aboutthefed/boardmeetings/nsfr-board-memo-20160503.pdf.
  16. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Federal Register: The Daily Journal of the United States, Proposed Rule, 81 Fed. Reg. 101, June 1, 2016. Access at: https://www.gpo.gov/fdsys/pkg/FR-2016-06-01/pdf/2016-11505.pdf.
  17. Ibid.
  18. Ibid.
  19. “Board vote on draft notice of proposed rulemaking to implement a net stable funding ratio requirement for large banking organizations,” Board of Governors of the Federal Reserve System, April 25, 2015. Access at: https://www.federalreserve.gov/aboutthefed/boardmeetings/nsfr-board-memo-20160503.pdf
  20. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” Federal Register: The Daily Journal of the United States, Proposed Rule, 81 Fed. Reg. 101, June 1, 2016. Access at: https://www.gpo.gov/fdsys/pkg/FR-2016-06-01/pdf/2016-11505.pdf.
  21. Ibid.

Newsletter Author: Venetia Woo, Hortense Viard, Sal Cutrona

Newsletter Contact Person: Nghi Pham

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

Disclaimer

This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

About Accenture:

Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 373,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Its home page is www.accenture.com.

Copyright © 2016 Accenture. All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances.

If you require advice or further details on any matters referred to, please contact your Accenture representative.

Submit a Comment

Your email address will not be published. Required fields are marked *