Net Stable Funding Ratio (NSFR)

Together with the Liquidity Coverage Ratio (LCR), the Net Stable Funding Ratio (NSFR) is the second liquidity risk indicator recently introduced in response to the financial crisis. Whereas LCR limits short-term outflows, NSFR measures structural liquidity risks; in other words the stability of refinancing compared to the overall structure of assets.

 

 

NSFR - already strategically important

In all probability, NSFR will become binding either next year or the year after under the CRR amendment currently proposed (often referred to as CRR II). As a structural indicator, however, NSFR is highly dependent on the overall structure of a balance sheet and therefore on long-term business decisions. Unlike LCR, it is difficult to optimise in the short term and is therefore subject to long-term controlling.

 

Issuances and swaps contracted today often run for more than five years and will probably still be part of the balance sheet, or reporting, when banks have to comply with NSFR.  All banks should therefore be giving some thought - even today - to NSFR compliance and to the impact of their individual products on NSFR in order to correctly include any potential negative impact in their pricing policy and financial controlling.

Implementing the indicator

 

The basic precondition for analysing NSFR impact is the implementation of a regulatory template. This helps determine how your bank is positioned in relation to NSFR compliance. As EBA has not yet prepared any final formats, d-fine would be pleased to support you by drawing up an approximate NFSR and by carrying out the system-based implementation.

 Impact on external and internal pricing

 

Once the decision has been taken to include NSFR in measurements and controlling, the next question concerns its specific implementation - either by including NSFR effects on Funding Value Adjustment (FVAs) calculations in the case of OTC derivatives, or by including the calculation in internal liquidity cost allocations. We can support you with specific modelling, sample calculations and allocation algorithms tailored to meet your bank’s requirements.

 

Key challenges at this point include determining specific modelling assumptions for FVA calculations that are consistent with the bank’s hedging and funding strategy. In terms of internal allocations, banks also need to take account of the interplay of the various products in view of the NSFR - such as the unexpected negative impact of covered bonds (Pfandbriefen) on the associated loans in the cover pool.

 

Integrating the NSFR in controlling and strategic alignment

 

It is highly likely that many banks will find the NSFR to be a significant limiting factor. As such, it certainly needs to be included in a bank’s financial controlling system. This can be done through its explicit inclusion in a KPI-based management system, for example, or by taking account of NSFR effects in both strategic business decisions and in the introduction of new products, or in the specific design of banking products. One example of the latter, for instance, is a specific NSFR bond that the issuer can call one year prior to the bond expiring in order to circumvent any negative NSFR impacts. Issuances usually have long terms. As such, product features especially aligned towards the NSFR need to be implemented today as these issuances are likely to expire after the NSFR is due to apply.

 

 

Our offer

 

d-fine can support you in all matters relating the NSFR - from interpreting and implementing the indicator to including the NSFR in internal and external pricing and including the NSFR in strategic corporate controlling:

 

  • Interpreting regulatory requirements
  • Implementing the template in your IT system
  • Integrating the NSFR in KPI-based methods of the overall bank controlling
  • Adapting measurement models for OTC derivatives in view of FVA and KVA
  • Including the NSFR in internal FTP methodology

 

Would you like to exchange some thoughts and ideas on the NSFR and its significance for your institute? We are happy to arrange an appointment with specialists in your company and are looking forward to hearing from you.

 

For more detailed information please call us on +49 69 907370 or send an e-mail to info@remove-this.d-fine.de with the subject heading “NSFR”.