Net Stable Funding Ratio Research Articles

The Net Stable Funding Ratio: Impact and Issues for Consideration

As part of Basel III reforms, the NSFR is a new prudential liquidity rule aimed at limiting excess maturity transformation risk in the banking sector and promoting funding stability. The revised package has been issued for public consultation with a plan of making the rule binding in 2018. This paper complements earlier quantitative impact studies by discussing the potential impact of introducing the NSFR based on empirical analysis of end-2012 financial data for over 2000 banks covering 128 countries. The calculations show that a sizeable percentage of the banks in most countries would meet the minimum NSFR prudential requirement at end-2012, and, further, that larger banks tend to be more vulnerable to the introduction of the NSFR. Additionally, by comparing the NSFR to other structural funding mismatch indicators, we find that the NSFR is a relatively consistent regulatory measure for capturing banks’ funding risk. Finally, the paper discusses key policy issues for consideration in implementing the NSFR.

The Net Stable Funding Ratio and Bankss Participation in Monetary Policy Operations: Some Evidence for the Euro Area

Based on a review of the analytical underpinnings of the effects of the NSFR on banks’ choices, this paper attempts to relate banks’ strategies to developments in the value of the ratio in the euro area. In spite of a not-so-near implementation date, the evidence is that the NSFR already matters for banks’ choices, and it might be more relevant as a decision variable than alternative leverage indicators. As part of a convergence process towards the 100 per cent threshold, we estimate that the ECB’s 3-year LTROs have raised the available stable funding by €429 billion as of June 2012 for the sample banks with a shortfall and that the NSFR may affect loans to the economy. In view of the phasing-in of the Basel III liquidity standards, the evidence suggests that, when evaluating non-standard monetary policy measures, central banks should also take into account their impact on the fulfillment of the NSFR and the possible cliff effects related to their expiration.

The Information Value of Basel III Liquidity Risk Measures

We calculate the approximate measures of the liquidity coverage ratio and the net stable funding ratio of the Basel III liquidity risk framework using the call report data of U.S. banks. We find that the new measures have little predicting power of bank failures when compared with traditional liquidity risk measures. We also find that marketwide liquidity risk was the major predictor of bank failures in 2009 and 2010. Finally, our study sheds light on the assumptions on net cash outflow rates in the Basel III liquidity risk standards.

Measuring Liquidity Mismatch in the Banking Sector

This paper implements a liquidity measure, Liquidity Mismatch Index (LMI), to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We construct the LMIs for 2882 bank holding companies during 2002-2014 and investigate the time-series and cross-sectional patterns of banks' liquidity and liquidity risk. Aggregate banking sector liquidity worsens from $4 trillion before the crisis to -$6 trillion in 2008, and reverses back to the pre-crisis level in 2009. We also show how a macro-prudential liquidity stress test can be conducted with the LMI metric, and that such a stress test could have revealed the fragility of the banking system in early 2007. In the cross section, we find that banks with more ex-ante liquidity mismatch have a higher stock-market crash probability and are more likely to borrow from the government during the financial crisis. Thus the LMI measure is informative regarding both individual bank liquidity risk as well as the liquidity risk of the entire banking system. We compare the LMI measure of liquidity to other measures such as Basel III's liquidity coverage ratio and net stable funding ratio, and show that LMI performs better in many dimensions. The outperformance of LMI partially results from the contract-specific time-varying liquidity sensitivity weights which are driven by market prices.

Capital Requirements Directive IV A Basel 3 - prínosy, nové pravidlá a ich dopad

This article is devoted to the banking sector regulation in the European Union and worldwide. The banking regulation is used to control banking risk activities and sustainable portfolio growth. Basel Committee on Banking Supervision (BCBS) coordinates this regulation process and supervision in the world. BCBS prepared the latest regulation called Basel 3. The European Union implemented Basel 3 with legislative package called CRD IV. We describe Basel 3 and CRD IV provisions with focus on capital adequacy, liquidity and leverage. CRD IV improves the capital quality and brings new capital buffers for systemic important institutions and systemic risk, conservative buffer and countercyclical buffer. CRD IV strengthens liquidity and leverage regulation. There are introduced three controlled ratios: liquidity coverage ratio (LCR) for short-termed liquidity, net stable funding ratio (NSFR) for long-termed liquidity and leverage ratio (LR) for leverage analysis. They are calibrated. There are described differences among these documents. Finally, we sum up assessment studies about Basel 3 and CRD IV impact on the European banking sector and economy.

The Basel III Net Stable Funding Ratio and bank net interest margins

The Net Stable Funding Ratio (NSFR) is a new Basel III liquidity requirement designed to limit funding risk arising from maturity mismatches between bank assets and liabilities. This study explains the NSFR and estimates this ratio for banks in 15 countries. Banks below the ratio need to increase stable sources of funding and to reduce assets requiring funding. The most cost-effective strategies to meet the NSFR are to increase holdings of higher-rated securities and to extend the maturity of wholesale funding. These changes reduce net interest margins by 70–88 basis points on average, or around 40% of their year-end 2009 values. Universal banks with diversified funding sources and high trading assets are penalized most by the NSFR.

A note on Basel III and liquidity

In this article, we obtain numerical results involving new Basel III liquidity regulation. More specifically, we compute the net stable funding ratio in accordance with the prescripts of the proposed banking rules. In this regard, we investigate the effects of shareholder cash flow rights on the aforementioned funding ratio and a non-Basel III liquidity coverage ratio for certain developing countries during the period 2005 Q1 to 2009 Q4. Our study finds that the funding ratio appears to have satisfied Basel III minimum liquidity standards during this period. Also, we conclude that more concentrated cash flow rights result in improved liquidity.

Basel III and the Net Stable Funding Ratio

We validate the new Basel liquidity standards as encapsulated by the net stable funding ratio in a quantitative manner. In this regard, we consider the dynamics of inverse net stable funding ratio as a measure to quantify the bank’s prospects for a stable funding over a period of a year. In essence, this justifies how Basel III liquidity standards can be effectively implemented in mitigating liquidity problems. We also discuss various classes of available stable funding and required stable funding. Furthermore, we discuss an optimal control problem for a continuous-time inverse net stable funding ratio. In particular, we make optimal choices for the inverse net stable funding targets in order to formulate its cost. This is normally done by obtaining analytic solution of the value function. Finally, we provide a numerical example for the dynamics of the inverse net stable funding ratio to identify trends in which banks behavior convey forward looking information on long-term market liquidity developments.

The relationship between liquidity risk and probability of default: Evidence from the Euro area

The main objective of this study is to analyze the type of relationship that exists between liquidity risk - measured with the liquidity coverage ratio and the net stable funding ratio - and the probability of default. The sample is composed of 575 listed and non-listed Eurozone banks and the methodology applied in the analysis is OLS regression based on panel data. The results show a relationship only between the liquidity coverage ratio and credit rating, while there is no relationship between the longterm liquidity measure and probability of default. In relation to the crisis, the results highlight divergent bank liquidity management only in the short time horizon.

Aggregate Investment Externalities and Macroprudential Regulation

Evidence suggests that banks tend to lend a lot during booms and very little during recessions. We propose a simple explanation for this phenomenon. We show that instead of dampening productivity shocks, the banking sector tends to exacerbate them, leading to excessive fluctuations of bank credit, output, and asset prices. Our explanation relies on three ingredients that are characteristic of modern banks’ activities: moral hazard, high exposure to aggregate shocks, and the ease with which capital can be reallocated to its most productive use. At the competitive equilibrium, banks offer privately optimal contracts to their investors, but these contracts are not socially optimal: banks reallocate capital excessively upon aggregate shocks. This is because banks do not internalize the impact of their decisions on asset prices. We examine the efficacy of possible policy responses to these properties of credit markets, and derive a rationale for macroprudential regulation in the spirit of a Net Stable Funding Ratio.

The Cyclical Effects of Accounting Rules on Basel III Liquidity Regulation

Basel III introduces the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to enhance bank liquidity regulation. This paper investigates whether accounting rules have pro-cyclical effects on these liquidity requirements. By rearranging and simplifying the formulae for the LCR and the NSFR, the paper analyses the linkages among accounting rules, capital rules and liquidity ratios. Due to these linkages, recurring fair value measurements are found to have pro-cyclical effects on both the LCR and the NSFR whereas the provision for loan losses is found to have positive effects on the NSFR although it has little impact on the LCR. The expected loss (EL) model for loan loss provisioning will introduce a new pro-cyclical impact on the NSFR even though it will lessen the pro-cyclical impact of the incurred-loss impairment model on the leverage ratio. Therefore, the contribution of accounting rules to the pro-cyclicality in the regulatory system will be enhanced as the paper also finds that the Basel III liquidity rules and the Basel III capital rules will reinforce each other’s pro-cyclicality.

The Good and Bad News about the New Liquidity Rules of Basel III in Western European Countries

New liquidity rules phased in under Basel III define the new net stable funding ratio (NSFR) to promote sustainable funding structures at financial institutions. In this paper we analyze characteristics and drivers of NSFR for a sample of 921 Western European banks between 1996 and 2010. We find that a majority of banks have historically not fulfilled NSFR minimum requirements, in particular larger and faster growing institutions as well as banks also active in asset management and investment banking. Many of them have started increasing NSFR with the onset of financial crisis 2008 while this ratio had been sliding in earlier years. Interestingly, potential advantages in funding costs for low NSFR banks do not seem to translate into higher profitability and results of these banks are more volatile.

The cost of bank liquidity

Many banks are under regulatory pressure from Basel III to improve liquidity by investing in more short-term, low-risk securities and to fund assets by more long-term, stable sources of debt. The relationship between short-term and long-term interest rates is known as the term structure of interest rates long evaluated by financial economists. This article empirically demonstrates the importance of a liquidity premium and a credit risk premium within the term structure and notes the financial consequence of these incremental costs on banks trying to enhance their liquidity coverage ratio or their net stable funding ratio. Liquidity has a cost that will reduce bank profits via a lower net interest spread. If bank liquidity is sufficient to withstand subsequent periods of market stress, the regulatory plan will reduce public expenditures often associated with bank failure.

Measuring Systemic Liquidity Risk and the Cost of Liquidity Insurance

I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI — measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost.

Short-term wholesale funding and systemic risk: A global CoVaR approach

We use the CoVaR approach to identify the main factors behind systemic risk in a set of large international banks. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find weaker evidence that either size or leverage contributes to systemic risk within the class of large international banks. We also show that asymmetries based on the sign of bank returns play an important role in capturing the sensitivity of system-wide risk to individual bank returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee’s proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.

Measuring Systemic Liquidity Risk and the Cost of Liquidity Insurance

I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost.

How to Make Regulators and Shareholders Happy Under Basel III

In addition to the Basel II capital ratio, Basel III requires banks to respect additional ratios, such as leverage ratio, liquidity coverage ratio and net stable funding ratio. Banks are required to be compliant with all four constraints simultaneously. Our article provides a framework for banks to help their search for an optimal, compliant business model. Recognizing that banks’ return and the four constraints are of linear type, this search can be formulated as a linear program and solved by standard software. Our approach can be customized to individual board preferences: to achieve compliance (making regulators happy) with a minimum of adjustments and still respecting a target return (making shareholders happy). Our approach needs two standard inputs from controlling: average profit margins per product and adjustment costs to expand or cut back business. To highlight its practicality, the approach is presented as industry study with figures from three representative German savings bank. We show in detail how our approach can deal with the numerous ratio interdependencies inherent in Basel III. Furthermore we discuss how our framework interacts with banks’ internal stress testing model to derive internal Basel III - target ratios and how it can incorporate potential future changes in product profitability.

Measuring Systemic Liquidity Risk and the Cost of Liquidity Insurance

I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost.

Short-Term Wholesale Funding and Systemic Risk: A Global Covar Approach

In this paper we identify some of the main factors behind systemic risk in a set of international large-scale complex banks using the novel CoVaR approach. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find no evidence that a larger size increases systemic risk within the class of large global banks. We also show that the sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee's proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.

IIII (Basel III and Global Financial Regulatory Reform)

바젤III란 2007년 금융위기를 계기로 전면 개편된 새로운 자본규제체계를 의미한다. 스위스 바젤에 위치한 바젤은행감독위원회(BCBS: Basel Committee of Banking Supervision)는 1988년 자기자본비율규제(바젤I)을 처음으로 제정하였으며, 2006년에는 신용등급에 따라 위험가중치를 차등화하고 리스크의 인식범위를 운영리스크 까지 확장한 신자기자본비율규제(바젤II)를 도입한 바 있다. 그러나 2007년 미국 서브프라임 모기지 부실로부터 촉발된 글로벌 금융위기는 자본규제를 포함하여 기존 금융규제의 한계를 노정하였으며, 이에 따라 국제사회는 금융위기의 재발 방지를 위한 광범위하고도 포괄적인 금융규제개혁의 일환으로 기존의 자본규제체계를 전면 개편한 새로운 자본규제체계, 즉 바젤III를 도입하게 되었다. 바젤III는 기존 바젤II 자본규제체계와는 몇 가지 점에서 차이가 있다. 우선, 바젤III는 진정한 손실흡수능력을 갖는 자본은 바로 보통주자본임을 명시하고, 이에 관한 규제비율을 새로이 도입하였다. 또한 경기순응성과 쏠림현상 등 미시건전성 규제가 가지는 문제점을 완화하기 위해 완충자본, 레버리지비율 등 거시건전성 목적의 규제수단을 새로이 도입하였다. 그리고 은행의 유동성리스크 관리를 획기적으로 강화하기 위한 단기 및 중장기 유동성비율규제를 도입하였다. 마지막으로 글로벌 금융위기의 주범인 시스템적으로 중요한 대형 금융그룹에 대하여 추가자본규제를 포함한 감독강화 방안을 마련하였다. 바젤III 규제체계는 지난 2010년 11월 G20 서울 정상회의에서 최종 승인·확정되었으며, 자본규제는 2013년부터 단계적으로 시행되었다. 저자는 바젤III의 제정 논의가 한창 진행 중이던 2010년에 바젤은행감독위원회의 사무국에 파견 근무하면서 치열한 논의의 현장을 직접 체험하고, 이러한 경험을 바탕으로 바젤III의 제정배경과 논의 내용을 정리하였다. 따라서 이 책은 바젤III를 이해하고자 하는 규제당국과 금융회사의 실무자, 그리고 학계의 연구자들에게 큰 도움이 될 것으로 기대된다. 이 책의 목차는 아래와 같다. 제1장 바젤Ⅲ의 개요와 경제적 영향 제2장 규제자본의 질, 일관성 및 투명성의 강화 제3장 부실 시점에서 규제자본의 손실흡수능력 강화 제4장 완충자본제도의 도입 제5장 거래상대방 신용리스크에 대한 규제강화 제6장 신용평가제도의 개혁 제7장 레버리지비율규제의 도입 제8장 글로벌 유동성 규제기준의 도입 제9장 거시건전성 감독의 의의와 실행체계 제10장 시스템적 중요 은행에 대한 감독규제 강화 This book, published in Korean 2011, gives an introductory explanation to the Basel III capital framework which was finalized in 2010 by the Basel Committee on Banking Supervision(BCBS). Recognizing the need to implement an urgent global regulatory reform after the 2008 financial crisis, G20 requested BCBS to complete the reform of Basel capital framework before Seoul G20 summit in October 2010. In response to the request, Basel Committee fiercely and repeatedly discussed different views and measures, and successfully reached an agreement on the Basel III reform in such a short period time despite of the suspicion that it would not be able to do so. The objective of the book is to give a summary and explain the background, issues and impact of Basel III capital framework. The book consists of 10 chapters. Chapter 1 : Summary of Basel III and its impact Chapter 2 : Strengthening the quality, consistency and transparency of regulatory capital Chapter 3 : Strengthening the loss absorbency of regulatory capital at the point of non-viability Chapter 4 : Introduction of capital buffer : capital conservation buffer and countercyclical capital buffer Chapter 5 : Counterparty credit risk and Basel III regulatory reform Chapter 6 : Credit rating agency and Basel III regulatory reform Chapter 7 : Introduction of leverage ratio Chapter 8 : Introduction of global liquidity standard: liquidity coverage ratio(LCR) and net stable funding ratio(NSFR) Chapter 9 : Macro-prudential supervision and its tools Chapter 10 : Basel III regulation on systematically important banks