South African banks say NSFR changes do not go far enough

New proposals are positive, but banks warn they will still fall short of the ratio's minimum

South African banks say they will find it easier to comply with the second of Basel III's new liquidity ratios after supervisors published a revised set of proposals on January 12, but warn the industry will still fall below the 100% compliance level demanded by the rules. A study conducted prior to the new proposals claimed that none of the country's big four banks would have a ratio in excess of 60%.

"We're positive on the reforms. There were some benefits and improvements that will make it easier for South African banks to meet the ratio. But the problem hasn't gone away, we don't think the industry will reach the 100% ratio; banks will probably be around the high 80s or very low 90s. But it is a step in the right direction," says Lizanne Minnie, head of liquidity risk management at Standard Bank in Johannesburg.

The net stable funding ratio (NSFR) is designed to push banks away from unreliable funding sources and make them more resistant to liquidity risk. However, like its companion, the liquidity coverage ratio (LCR), it proved controversial in some countries, where banks and regulators alike complained the industry would find it hard to comply. South Africa's problem is that its retail deposit market is relatively small, depriving its banks of a key source of stable funding. The industry also argued that local forms of wholesale funding are more reliable than those used elsewhere.

Some of those issues have now been addressed, and while South African banks fear further change is unlikely, their regulator says the debate has some way to run.

"Other member countries are also submitting comments and thus the paper is nowhere near final. However, the current paper does benefit South Africa and should help in closing the gap in meeting the NSFR", says René van Wyk, registrar of banks at the South African Reserve Bank in Pretoria.

We don't think the industry will hit the 100% ratio – banks will probably be around the high 80s or very low 90s

The NSFR is calculated by dividing a bank's available stable funding (ASF) by the required amount of stable funding, determined by applying regulatory multipliers to its assets and liabilities. The bank must maintain a ratio of at least 100%.

Under the old proposals, banks would have applied a multiplier of 90% – a so-called ASF factor – to all stable retail deposits, defined as accounts covered by a deposit insurance scheme. South Africa does not have deposit insurance, so its banks would have applied an 80% ASF factor instead. Under the new proposals, that gap is narrower – stable deposits get a 95% ASF while less stable ones are multiplied by 90%.

While the change is welcomed, banks are most effusive about changes to the factors on wholesale funding, which makes up 40% of bank funding in South Africa, according to research by Rand Merchant Bank, compared to the 20% that comes from retail customers. Under the original proposals, banks could use higher ASF factors for funding with effective maturities of more than one year. But the structure of the South African market makes this difficult. Local money-market funds, which are large buyers of local bank debt, cannot buy paper with a maturity of longer than 12 months. As a result, all funding, secured and unsecured, from money-market funds – a financial institution under the rules – was assigned an ASF factor of 0%, effectively excluding it from a bank's ratio.

The new rules created a second band, however, allowing funding with a residual maturity of not less than six months and less than one year – including funding from central banks and financial institutions – to receive a factor of 50%. The rules also give operational deposits – defined in the LCR as deposits generated by clearing, custody and cash management activities – a 50% ASF factor, whereas before they were assigned a 0% factor.

"The higher percentage for retail and SME deposits is not going to fundamentally change the NSFR for us, but the changes to operational deposits are a nice surprise. The introduction of this new category implies deposits from financial institutions, such as a pension fund maintaining short-term working capital in cash at a bank, for instance, are deemed to be operational and instead of counting as 0% will now contribute to our ratio at a factor of 50%," says Paul Bowes, head of group funding and strategic liquidity management at Nedbank in Johannesburg.

Despite the amendments, South African banks say they are still unlikely to hit the ratio minimum. As such, banks are already engaging regulators on the issue of how to comply, says Andries du Toit, the Johannesburg-based head of funding and capital management at FirstRand Banking Group.

Risk understands national regulators do have room for national discretion in areas such as netting definitions for derivatives exposures, the recognition of off-balance sheet committed and uncommitted liquidity facilities, as well as the definition of operational deposits.

Meanwhile, banks are also starting to consider alternative funding strategies. Nedbank's Bowes says the bank is currently considering increasing its long-term funding through securitisation, obtaining more transactional operational market share and even developing new types of product that would encourage asset managers to invest beyond a six-month maturity.