15
Citi Perspectives
| Q1/Q2 2015
of eligible liquid assets. The LCR
was enforced by many jurisdictions
in 2015 (e.g., by the U.S. agencies in
September 2014) and its impact has
already been widely discussed.
The NSFR aims to support banks’
long-term stability and resilience
by creating a framework for them
to hold long-term stable funding in
relation to their assets to ensure
that funding risk is significantly
reduced. The stability of liabilities
under the NSFR is determined
by the funding tenor, where long
term liabilities are assumed to be
more stable, and the funding type
and counterparty, where retail
and small- and medium-sized
enterprise deposits are assumed
to be behaviorally more stable
than wholesale funding from
other counterparties, such as
corporates and financial institutions.
Consequently, it has some significant
repercussions for corporates.
At a high level, the NSFR will — like
LCR — contribute to phenomena,
such as reduced bank lending; falling
bank profitability; increased financial
disintermediation; continued bank
capitalization exercises; less bank
trading activity and associated
reductions of liquidity in the market;
increased exposure of banks to
sovereigns; limited ability of banks
to redistribute financial risk and
potential concentration in some
asset classes; reduced support for
financing international trade; and
ultimately a transformation of banks’
role in the broader economy.
The NSFR is a complex calculation
which comprises an Available Stable
Funding Factor (ASF), which is the
portion of capital and liabilities
that is expected to be reliable
over the one-year time horizon of
the NSFR; and a Required Stable
Funding Factor (RSF), which is the
amount of stable funding that will be
required over the one-year horizon.
However, while complicated in detail,
the practical implications of these
factors on corporates are fairly
straightforward.
For the ASF side, corporate funding
with residual maturity of less than
one year, as well as operational
deposits (from transaction banking-
related activities) receive a 50% ASF
factor and will become less sought
after by banks. Other liabilities with
a maturity of over one year receive
a 100% ASF and will become very
attractive to banks in relation to
their NSFR compliance. On the RSF
side, corporate loans extended for a
period of less than one year require
50% long-term funding, and will
become more expensive to banks.
Banks will be dis-incentivized to lend
to corporates beyond one year as it
will require a 100% RSF.
Other implications of the NSFR
include the potential for derivatives
transactions to become more
expensive, given the tighter
requirements around netting and
collateralization. Another issue for
corporates to consider is that the
RSF factor, which describes how
much is required over the one-year
