As we know, sound liquidity risk management is a crucial aspect for the proper functioning of financial institutions (FIs) and has been key to facing stress scenarios in the past. Along these lines, in June 2023 the SBS issued the pre-publication of the new regulation for liquidity risk management, which is currently in the process of receiving comments from the general public, with a deadline of August 31.
What would be changing
The main proposed modification is the incorporation of a calculation indicator called the Net Stable Funding Ratio (NSFR), which is part of the international standards of the Basel III Committee. The NSFR is a ratio between available stable funding and required stable funding, and must always be greater than 100%.
In general terms, Available Stable Funding is the proportion of the FI's equity and liabilities projected to be stable over a one-year horizon. To this end, they are classified and weighted based on their relative stability, according to their contractual maturities (long-term liabilities are considered more stable than short-term ones); and their propensity to be withdrawn or canceled by creditors (liabilities from the retail sector are considered more stable than those from the wholesale sector).
On the other hand, Required Stable Funding comprises the FI's assets and contingents (off-balance-sheet exposure) that must be funded. The required amount is a function of its liquidity risk profile characteristics and residual maturity, applying a weighting factor on that basis. For example, unencumbered available assets have a factor of 0%, meaning they do not require stable funding, whereas restructured, refinanced, past-due loans and loans in judicial collection are assigned a factor of 100%.
Available stable funding / Required stable funding > 100%
The objective of monitoring this indicator is to encourage stable funding and avoid dependence on wholesale and short-term funding sources. In addition, by considering on- and off-balance-sheet accounts (contingents), it seeks to strengthen the assessment of funding risk for all types of exposure. With this new indicator, the regulator seeks a more resilient banking sector that can better face financial crisis scenarios and disruptions in typical funding sources, thereby avoiding significant effects on its liquidity position.
How will it impact financial institutions
From the standpoint of available stable funding, this new indicator could be a challenge for those FIs with low Tier 1 and Tier 2 regulatory capital and a high concentration of wholesale and short-term funding, since their available stable funding will probably be comparatively lower. Likewise, those FIs that efficiently manage their assets and investments, maintaining a good-quality portfolio with maturities aligned to the financed purpose, will require a comparatively lower level of stable funding.
In MicroRate's view, an in-depth analysis by FIs of each balance-sheet account will be key to identifying the gaps in their stable-funding management, defining strategies to mitigate these shortfalls, and complying with the levels required by the regulator within the adjustment period.
Prepared by MicroRate