Basel III Liquidity Framework: Basel Committee Publishes Final Document on Net Stable Funding Ratio

Sullivan & Cromwell LLP - November 7, 2014

On October 31, 2014, the Basel Committee on Banking Supervision (the “Basel Committee”), published a final document presenting the net stable funding ratio (“NSFR”), one of the key standards proposed by the Basel Committee to strengthen liquidity risk management as part of the Basel III framework (the “Final NSFR”).  The NSFR is designed to promote more medium- and long-term funding of the assets and activities of banks over a one-year time horizon, thus complementing the Basel III liquidity coverage ratio (“LCR”), the standard intended to address short-term liquidity risk management over a 30-day stressed horizon.  The NSFR is supposed to take effect as a binding requirement on January 1, 2018.

Originally proposed in 2009, the Basel Committee presented a revised NSFR framework for comment in a consultative document in January 2014 (the “2014 NSFR Proposal”).  Although the Final NSFR is largely consistent with the 2014 NSFR Proposal, it contains a number of changes and clarifications to that proposal, including:

  • The treatment and calculation of derivate exposures have been revised and clarified.
  • The list of assets requiring stable funding has been expanded to include assets posted as initial margin for derivative contracts, as well as a specified proportion of derivative liabilities.
  • Certain short-term exposures to banks and other financial institutions have been assigned higher funding requirements.
  • The Final NSFR introduces the concept that certain asset and liability items are interdependent and permits national supervisors, subject to certain enumerated conditions, to treat such items as neutral for purposes of the NSFR.
Like all Basel Committee standards, national supervisors must subsequently implement the NSFR in their respective jurisdictions.  The U.S. federal banking agencies (the “Agencies”) have not yet publicly addressed the application of the NSFR to U.S. banking organizations, including which U.S. banking organizations will be made subject to the NSFR.  It remains to be seen whether the Agencies will implement a more stringent version of the NSFR in the U.S. than the internationally agreed-upon Final NSFR – so-called “super-equivalence” in Agency parlance – as was the case with the Agencies’ implementation of the LCR.