NEW YORK--(BUSINESS WIRE)--The proposed net stable funding ratio (NSFR) requirements for large US banks highlights the increasing focus of bank regulation on liquidity, Fitch Ratings says. This proposal is the last major post-crisis regulatory rule to be released for US banks, perhaps underscoring the bigger challenges for liquidity regulation than capital requirements.
Liquidity was a key consideration in US bank resolution strategies, where seven of the eight banks tested were found to have either "deficiencies" or "shortcomings" associated with liquidity planning in their most recent resolution plans.
The standards are mostly consistent with the Basel requirement for the NSFR, which addresses longer term structural asset-liability mismatches. There are broad similarities between the NSFR weightings of various assets and liabilities in this proposal and the liquidity coverage ratio (LCR) treatment. The proposal would result in further funding optimization as US banks continue to adjust their liabilities for new regulation.
Large US banks have been adjusting their deposit mix in response to LCR rules. While the LCR focuses on shorter term funding risks, both liquidity rules encourage banks to favor retail insured deposits as well as more high quality liquid assets. We expect banks will continue to focus on growing these assets and liabilities. Longer term this may lead to lower risk and more liquid balances, which would be credit positive. That said, competition for both types of funding sources and assets, and their highly liquid nature is likely to weigh on net interest margins, and thus profitability for large banks.
Under the NSFR proposal, the amount of available stable funding (ASF) over a one-year time horizon must cover the required stable funding (RSF). The proposed ASF weightings favor regulatory capital elements and long-term liabilities (100 ASF factor) and insured retail deposits (95 ASF factor), whereas operational deposits and unsecured short-term wholesale funding of less than one year are weighted with a 50 ASF factor. On the asset side, the RSF factors are lower for very high quality liquid assets, with level 1 assets assigned a 5% RSF factor and level 2A assets at 15%.
The impact on banks of the NSFR proposal will be limited because the total shortfall from the new rule is only 0.5% of the RSF amount for affected banks, or around $39 billion, according to the US regulatory agencies' estimate. Also, not all banks are affected. The agencies have said that for the limited number of firms that would have a shortfall, the $39 billion would be equivalent to 4.3% of their total RSF amount.
Fitch expects banks to ultimately reach compliance with this rule when it goes into effect in 2018 and does not anticipate any ratings impact from this regulation.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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