Financial Firms Need A Strategic Approach To Japan’s Stringent LCR And NSFR Liquidity Reporting

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Step Back To See The Whole Painting

nsfr liquidity reportingJapanese financial firms need to reflect and then take a more strategic approach as they tackle the stringent liquidity reporting requirements set by the Financial Services Agency of Japan (JFSA). Similar to appreciating an impressionist painting, they need to step back and view the liquidity reporting requirements from different angles. One potential source for illumination is the experiences of global systemically important banks (G-SIBs), which, in recent years, have also had to comply with complex daily reporting requirements.

In the wake of the global financial crisis of 2008, the Basel Committee on Banking Supervision (BCBS) introduced a global, voluntary regulatory framework dubbed Basel III on bank capital adequacy, stress testing, and market liquidity risk. To more effectively deal with liquidity issues and avoid a financial meltdown, Basel III introduced two new standards, the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), to ensure that financial institutions have the necessary assets on hand to prevent liquidity disruptions resulting from changing market conditions both from short-term and long-term perspectives.

The Two Standards: A Snapshot

LCR is intended to require a bank to hold sufficient high-quality liquid assets (HQLA) to cover its net cash outflows over a 30-day period. It is calculated by dividing the total HQLA on hand by the total net outflows over 30 days.

On the other hand, the objective of NSFR liquidity reporting is to promote resilience over a longer time. The ratio is calculated by dividing a firm’s available stable funding (ASF) by its required stable funding (RSF).

The Standards In Japan: One Active, One Pending

JFSA has implemented LCR using the phased approach stipulated in Basel III – a minimum coefficient of 60% required in 2015, which rose in equal annual steps and reached 100% on January 1, 2019.

In contrast, the implementation of NSFR liquidity reporting currently remains under review. JFSA published draft regulations for the ratio in June 2018. However, in April 2020, the agency indicated that the regulation would not be implemented in 2021 as originally planned.

Added Challenges For Japanese Banks

To enhance the effectiveness of LCR, JFSA has introduced the “approximate LCR”. Financial institutions are required to calculate an approximate LCR on a daily basis. If the coefficient is below 80% on any day, firms must report it to JFSA within two days as a separate report, and thereafter submit a report daily to the regulator until resolved. In addition, to supplement LCR, JFSA requires the submission of template reports relating to the following BCBS monitoring tools: contractual maturity mismatches; concentration of funding; unencumbered liquidity assets; and LCR by major currency.

Looking To G-SIBs For Basel Journey Perspectives

JFSA’s expanded approach to LCR requirements is in many respects similar to the daily reporting measures required of G-SIBs by a number of regulators, and may even be more stringent. As such, strategically, Japanese institutions can draw insight from the reporting experiences of G-SIBs. Japanese banks need functional, technological, and operational readiness that mirror the approaches taken by many G-SIBs to create a solid risk and regulatory reporting foundation for their ongoing Basel journeys.

All On One Canvas: AxiomSL’s Liquidity Reporting, Data Management, And Risk Calculations

Deployed on its secure RegCloud® or on-premises, AxiomSL’s ControllerView® data integrity and control platform provides institutions with a strategic and scalable end-to-end reporting capability to address regulatory reporting transparently and efficiently across Basel and other frameworks. Underpinned by its extensible data dictionary and powerful risk calculation architectures, AxiomSL’s solutions provide a framework for a range of complex Basel-related liquidity calculations, including for LCR, NSFR liquidity reporting, and stress testing scenarios.

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