15 May 2014

Risk.net: Basel split over NSFR impact on repo

EU and US regulators are split over pending new rules on bank funding that threaten to drive up repo market costs. Some US regulators have spoken publicly about using the net stable funding ratio (NSFR) to make repo transactions more expensive, but their European counterparts are more cautious.

"When we have talked to regulators at the Basel Committee about this, it's quite clear there is a US camp and a European camp, and there are some negotiations going on there", Jonas Svärling, head of risk and capital management at Sweden's SEB, told delegates at the Risk & Return Nordics conference in Stockholm.

The past three months have seen frantic lobbying by banks over the proposals, published by the Basel Committee on Banking Supervision. If the NSFR is implemented in line with the committee's January proposals, prices for some repo transactions would rocket five or 10 times higher, Svärling warned – but he added that regulators appear to be considering some amendments.

"We dislike the NSFR quite a lot in terms of the way it's defined. We don't think it's that well linked to the risks, so we have spent quite a lot of time talking to regulators at the Basel Committee... and we think that some things might actually change. We have a feeling they are actually concerned that this should work in a good way", he said.

A buy-side speaker at the event raised the same issue in a later presentation. "There is an expectation that it might be harder to repo securities because higher costs mean lower liquidity. If that is the case, then it will be much harder to access liquidity if you are an asset owner than it was before, which means your cost of capital will go up", said Patrik Roos, chief executive of hedge fund Vanna Capital.

The source of the problem is the differing treatment the NSFR applies to repos and reverse repos with non-banking entities such as money market funds and asset managers, which are big users of the market. The ratio is calculated by dividing a bank's available stable funding (ASF) by its required stable funding (RSF), with a minimum of 100 per cent. The ASF and RSF totals are determined by applying a regulator-set multiplier to bank assets and liabilities – the aim being to ensure banks are not overly reliant on short-term, wholesale funding.

The draft rules say unencumbered loans – which includes reverse repos – with non-bank financial institutions receive a 50 prt cent RSF. However, the opposite repo trade with a non-bank financial institution receives a 0 per cent ASF. This means that for every $100 lent to these counterparties via a reverse repo, $50 of term funding would be required.

The big question is whether regulators intended the rules to have such a big impact – and whether they are all on the same page. In a speech on the topic of shadow banking last November, Daniel Tarrullo, a governor of the US Federal Reserve, identified the NSFR as a way of making securities financing more expensive.

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