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Monday, August 8, 2016

ABA: NSFR Is Unnecessary, Structurally Flawed

The proposed Net Stable Funding Ratio – a long-term liquidity measurement included in the Basel III liquidity standards – is structurally flawed and unnecessary for U.S. financial stability, ABA told the federal banking agencies in a comment letter.

Noting the array of regulatory standards put in place since 2009 – from the Liquidity Coverage Ratio to surcharges for global systemically important banks to liquidity stress testing – ABA said:
it is unclear why the NSFR is necessary or why the supervisory process is insufficient to address any remaining firm-specific matters. It is hard to discern any value that the NSFR brings to bank supervision or bank management not already provided by other regulatory tools and practices.

ABA also pointed out fundamental flaws in the NSFR structure. For example, it relies on flawed assumptions contained in the LCR. (The NSFR is designed to ensure that covered firms maintain a stable funding profile over time; the LCR measures cash flow over a 30-day stress period.) ABA has on numerous occasions pointed out the LCR’s weaknesses – for example, its assumption that deposits leave banks in a stress situation, when U.S. experience is the opposite.

If adopted, the NSFR would apply to banking institutions with more than $250 billion in total assets or $10 billion or more in on-balance sheet foreign exposures. The Fed will also apply a modified NSFR to certain bank holding companies with more than $50 billion in assets. Institutions subject to the rule would be required to publicly disclose their NSFRs quarterly using a standard template. The proposed NSFR consists of the amount of available stable funding over a year divided by the institution’s required stable funding, with the numerator required to equal or exceed the denominator.

Read the letter.

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