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E-MailThe following post comes to us from Debevoise & Plimpton LLP and is based on the introduction to a Debevoise & Plimpton Client Update; the full publication is available here.
On October 31, 2014, the Basel Committee on Banking Supervision (the “Basel Committee”) released the final Net Stable Funding Ratio (the “NSFR”) framework, which requires banking organizations to maintain stable funding (in the form of various types of liabilities and capital) for their assets and certain off-balance sheet activities. The NSFR finalizes a proposal first published by the Basel Committee in December of 2010 and later revised in January of 2014. Particularly given the historical trend as between the Basel Committee and U.S. banking agency implementation and in line with its Halloween release, it has left many wondering: Is it a trick or a treat?
The NSFR is designed by the Basel Committee to work in conjunction with the Liquidity Coverage Ratio (the “LCR”), finalized by the Basel Committee in January of 2013 and implemented in the U.S. by the Board of Governors of the Federal Reserve (the “Federal Reserve”), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (together, the “U.S. Regulators”) in September 2014 (the “U.S. LCR”). [1] While the LCR is designed to promote short-term liquidity resilience by ensuring that affected banking organizations maintain high quality liquid assets to fund their short-term liquidity needs in times of stress, the NSFR aims to reduce funding risk over a longer horizon by requiring affected banking organizations to have available stable sources of funding for their assets and activities.
Both the LCR and the NSFR seek to address concerns that arose during the financial crisis when banking organizations had insufficient liquidity to continue their lending and other operations. By imposing quantitative liquidity requirements on banking organizations, the LCR and the NSFR seek to ensure that they have sufficient cash and cash equivalents to operate during times of significant stress and market dislocation, thereby reducing the risks associated with those eventualities.
The practical impacts of the two rules, however, have many banks and bank-affiliated broker-dealers (which are indirectly subject to the rule by virtue of their parent bank holding companies being so subject), as well as their customers, concerned about the viability of various businesses, including securities finance, proprietary trading [2] and traditional lending (including margin lending). At the very least, the combined effect of the LCR and the NSFR will likely be increased costs for these and other banking organization functions.
We summarize key aspects of the NSFR in a series of questions and answers in the full publication. We also highlight a number of comparison points between the U.S. LCR and the NSFR.
Endnotes:
[1] See Debevoise & Plimpton, Client Update: Questions and Answers on the Liquidity Coverage Ratio (Sept. 17, 2014), available at http://www.debevoise.com/insights/publications/2014/09/questions-and-answers-lcr; see also Lee A. Schneider, How to Implement Procedures for the LCR Rules, Compliance Reporter (Sept. 22, 2014), available at http://www.complianceintel.com/Article/3381655/How-To-Implement-Procedures-For-The-LCR-Rules.html.
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[2] The Volcker Rule, as incorporated in section 619 of the Dodd-Frank Act, places limits on the proprietary trading activities of banking organizations. In addition to the required stable funding for a banking organization’s outstanding exposures, a banking organization must ensure such exposures meet an applicable exclusion or exemption under the Volcker Rule. 12 U.S.C. § 1851.
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