27 June 2016

EBF response to DG FISMA consultation paper on further considerations for the implementation of the NSFR in the EU

The EBF supports a Net Stable Funding Ratio (NSFR) as a structural liquidity risk metric but advocates that the ASF and RSF factors in the NSFR should reflect a sustainable business-as-usual approach that is consistent with the role of the banking industry in liquidity maturity transformation.

European Banking Federation (EBF) supports a Net Stable Funding Ratio (NSFR) as a structural liquidity risk metric based on sustainable business-as-usual assumptions in the long term, to complement the short term stressed Liquidity Coverage Ratio (LCR).

The Basel NSFR however would be highly detrimental to CMU as the Basel assumptions that apply on capital market activities are overly penalising.

• The asymmetrical treatment of repos (0% Available Stable Funding (ASF)) and reverse repos (10-15% Required Stable Funding (RSF)) risks reducing market liquidity. It will also disincentivise banks which are long on liquidity from lending into the market.
• The high RSF applied to some of the securities held on balance sheets, e.g. 50-85% RSF, is extremely penalising when, in a large number of cases, the assets are held for client facilitation as market-risk hedges.
• Unsecured loans and loans secured by non-Level 1 assets between institutions receive 15% RSF while deposits from intuitions are not recognised as a funding source (0% ASF) when shorter than 6 months maturity.
• With respect to reverse repos with level 1 collateral e.g. government bonds (10% RSF) there appears to be an inconsistency with the LCR, which assumes that a firm will always be able to repo a Level 1 asset, even in a stressed market.

The application of the NSFR derivatives rules as envisaged within the BCBS standard would be extremely detrimental for the functioning of the European derivatives markets, and ultimately, for the European end users such as SMEs, larger corporates, pension funds and other client serving entities who require the ability to hedge away risk:

• The linkage between Leverage Ratio and NSFR introduces restrictions on netting between derivative assets and liabilities, as well as on collateral recognition, which both are inappropriate for liquidity purposes, and in particular for the one year NSFR time horizon.
• The NSFR denies netting of HQLA assets against derivatives exposure (permitted in the LCR even in a stress scenario). Liquid securities received as variation margin should be fully eligible for netting within the NSFR.
• The BCBS’s 20% RSF add-on for future potential derivatives exposure using gross derivative liabilities, is an inadequate and highly inaccurate measure of the potential change in the funding requirements generated by the derivative portfolios. The EBF proposes that this requirement is removed entirely. Should an alternative be considered, we suggest the Commission considers the use of a Delegated Act to develop the most appropriate treatment of derivatives in the NSFR.
• o The re-hypothecable initial margin received should be allowed to offset IM posted before the 85% RSF factor is applied.

Secured funding is an important component of strengthening the disintermediation of financing in Europe, even more so as Europe does not have agencies that exist in other jurisdiction (e.g. the US). The NSFR treatment of encumbered loans act as a deterrent to secured funding and would act as a brake on the financing capacity.

• Mortgage loans funded via covered bonds are categorised as encumbered and receive a higher RSF weighting compared to mortgage loans funded via unsecured bonds. This approach provides inappropriate incentives for mortgage credit Institutions to replace covered bonds by shorter term senior bonds.
• Mortgage loans should have the same RSF when used as collateral. Further, the compulsory overcollateralisation should also be considered as encumbered, but the voluntary overcollateralisation should be treated as unencumbered.

For short term loans activities, such as Trade and Export Finance (lending under officially supported export credit insurances/ECAs) or Factoring, which are and will most probably remain bank-intermediated, the BCBS NSFR would make those activities more expensive for customers. This could in turn lead to banks abandoning this business.

• An RSF of 65% should apply to export credits covered by ECAs of the EU Member States and trade finance loans should receive a 0% RSF when their residual maturity is lower than 6 month, 25% below 1 year, and 85% otherwise.

The NSFR should generally be fulfilled on either a consolidated or individual basis, accordingly with each banking group liquidity structure and existing derogations/waivers. Should the NSFR be required on an individual sub group basis for banks which manage their liquidity centrally we consider that there is room to make the NSFR requirements more fit for purpose through the application of intragroup preferential treatments.

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