Setting up a solid foundation to meet liquidity requirements
Leading up to the financial crisis of 2008-09, some banks made use of excessive amounts of short-term wholesale funding to finance their long term lending activities. Eventually, when faced with a shortage of short-term wholesale funding, these financial institutions were forced to sell-off their assets at significant discounts that had an adverse effect on the confidence in the financial sector, and subsequently triggered a number of banks into insolvency. To address these issues, promote funding stability and limit over-reliance on short-term wholesale funding, the Basel Committee on Banking Supervision (BCBS) finalised the Basel III package of measures that introduced two globally harmonised minimum liquidity standards. While the Liquidity Coverage Ratio (LCR) was designed to address an immediate period of severe stress ensuring banks have sufficient liquidity, Basel III also included a longer term structural funding measure, the Net Stable Funding Ratio (NSFR), with an objective to establish a minimum stable funding requirement based on the liquidity characteristics of a bank’s assets and off balance sheet (OBS) activities.
Although the final BIS standard for the NSFR has been published, most of the national regulators are yet to come up with the final guidelines on NSFR for the banks in their own jurisdictions. There are certain aspects of the BIS NSFR rules that require a more in depth study of the affected markets and instruments which are more location and region specific. Its future compliance may entail far more challenges than the LCR which may have unintended consequences on overall financial market stability and growth. Implementation of these NSFR standards across jurisdictions will also bring about some new data and technological challenges.
This whitepaper looks into the specific treatments under the BIS NSFR standards, the challenges posed across multiple spectrums as well as the potential opportunities going forward.
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