Net Stable Funding Ratio (NSFR)
NSFR Continues the Trend of Funneling Liquidity to Sovereign Debt
Last updated: January 2, 2018
The NSFR Proposal:
Basel III is an internationally agreed upon set of standards intended to strengthen the regulation, risk management, and supervision of the banking sector. It includes a mandate for the Net Stable Funding Ratio (NSFR), one of two new liquidity ratios.The NSFR requires banks with $250+ billion in assets to maintain a stable, one-to-one ratio or better of “available stable funding” relative to the composition of their assets and off-balance sheet activities. Such funding must have a maturity of one year or more, and include some deposits and equity. The NSFR generally is intended to shift liability maturities past the one-year threshold.
The NSFR is the second of two ratios required by the BCBS, and was preceded by the Liquidity Coverage Ratio (LCR)
, which is intended to reinforce the shortterm liquidity health of larger institutions. It requires banks to maintain an adequate supply of unencumbered ‘high quality liquid assets’ (HQLAs) that can be converted into cash easily and immediately to meet its liquidity needs for a 30-day stress period. Pursuant to Basel III, the LCR requirement was phased in by the U.S. starting in January 2015 and took full effect in January 2017.
CMBS Doesn’t Make the Cut for Preferential Treatment:
HQLA assets are divided into three levels: 1, 2A, and 2B,with increasing market-value haircuts applied to the HQLA assets based on the level. While IG-rated corporate debt securities are deemed to be Level 2B (25% to 50% haircuts), triple-A rated CMBS do not qualify as HQLAs.
What products the NSFR covers:
The rule will apply to CMBS, CRE CLOs, CMBX and to all commercial and multifamily real estate whole loans with maturities of more than one year.
Impact of the rule:
The proposed rule has not yet been finalized by U.S. regulators, but certain banks believe that the NSFR could be one of the more onerous capital and liquidity frameworks applied to date. The NSFR rule will reduce large banks’ capacity for leverage even more than is currently available, particularly within their brokerdealer activities. This means that markets overall could suffer from some further contraction in liquidity. Within the securities markets and because of the NSFR’s proposed risk weighting categories, the NSFR rule will tip lending costs even more to favor commercial and industrial financing and disadvantage commercial mortgage backed securities (CMBS).