The objective of the Net Stable Funding Ratio (NSFR) is to reduce liquidity risk over a longer time horizon by requiring banks to fund their activities from sufficiently stable sources. The new regulatory ratio will enter into force in Switzerland on 1 July 2021. What do Swiss banks need to do?
Basel III introduced two measures to reduce excessive liquidity risk, namely the Liquidity Coverage Ratio (LCR), which has been in place in Switzerland since 2015 with a transitional period until last year, and the NSFR, which will be implemented next year.
The objective of the NSFR is to reduce liquidity risk over a longer time horizon by requiring banks to fund their activities from sufficiently stable sources. The Basel Committee finalised the NSFR in 2014 and FINMA published on 12 November 2020 the changes to the circular allowing this ratio to enter into force in Switzerland on 1 July 2021. In the EU the implementation date will be at approximately the same time on 28 June 2021, while the UK has chosen to delay until 1 January 2022.
Swiss banks have been reporting the Basel version of the NSFR to the SNB for quite a while now but only for the regulator’s information. Now the NSFR becomes a real requirement, with a minimum ratio of 100%.
One could argue that not much is new because banks have had time to adjust – since 2015. But the NSFR should not be written off as old news just yet.
Not all banks are at 100% yet and the deadline is approaching fast, in less than 8 months.
Also, the final FINMA version contains some changes and has a little Swiss finish, which is important to consider. Some of the differences from the Basel version will actually make it easier for banks to comply:
- Most notably, banks that are part of the small banks’ regime in force since 1 January 2020 won’t have to report NSFR
- There is specific treatment for mortgages used to back Swiss covered bonds issued by the Pfandbriefzentrale, to allow for pooling, taking into account the minimum cover ratio
- Similarly, it is possible to consider mortgages used in a cover pool as unencumbered if not used to reach the minimum cover ratio
- Claims on the Swiss central bank and on the Swiss government in foreign currency can be counted as HQLA level 1 if taken against outflows in that currency
- Claims on financial institutions guaranteed by the central government can be treated as claims on central government
- Wholesale brokerage can be assimilated to claims on financial institutions
- The Available Stable Funding (ASF) is 90% for 3a pillar accounts
- Interdependent assets and liabilities can be assigned 0% ASF and Required Stable Funding (RSF)
- Certain intragroup funding or guarantees can benefit from a 0% RSF
While all of the above is good news, there are also some instances where the Swiss text is less generous than the Basel text:
- The replacement cost amount of ‘settled-to-market’ derivatives should be calculated as if no settlement payments and receipts had been made
- ASF will be 0% for intragroup funding from group entities whose financing is deemed unstable and RSF 100% for intragroup funding to group entities whose financing is deemed unstable
- Operational deposits are assimilated to short term deposits
What should banks do to prepare?
While we expect that most Swiss banks will be able to meet the NSFR requirement within the proposed implementation timeframe, some will need to structurally change the type and duration of their funding. For instance, they may have to move away from short-term wholesale funding and make sure their funding is longer term and from more stable sources. This will be key for compliance with the new requirement.
Banks should also:
- Define policies and procedures to correctly classify assets and liabilities, establish where judgement is required, and make sure reporting is adequately adjusted to the final text, in coordination with the reporting solution provider
- Evaluate the impact of the revised NSFR on funding demands and costs for specific activities and products
- Evaluate broader business implications, and opportunities for balance sheet optimisation, taking into account the interplay of the various capital and liquidity metrics, including the changes to come from the finalisation of Basel 3
- And finally, for Swiss banks that are part of international groups, take into account the different versions of the NSFR with which they need to comply in different parts of the group, to make sure calculations at the stand-alone and consolidated levels comply with each and every one of the regulators’ expectations.
- Previous Prioritise climate risk management to protect your future: The impact of climate-driven regulatory initiatives on Swiss financial institutions
- Next Modern Slavery: The important role financial institutions can play in combatting it