Risk & Return Cape Town: Dealers expect deviation from NSFR standard

Bankers say some local markets may be forced to deviate from the NSFR standard – that’s if the Basel Committee decides to go ahead with it at all

Local markets may be forced to deviate from the Basel II standard on the net stable funding ratio (NSFR), as it will be too difficult to implement in certain countries, said speakers at the Risk & Return conference in Cape Town today.

The NSFR, scheduled to be implemented from 2018, is intended to deal with longer-term structural liquidity mismatches by establishing a minimum acceptable amount of stable funding based on the liquidity characteristics of a bank's assets and activities over a one-year horizon.

However, some markets have few sources of long-term stable funding – for instance, retail deposits covered by a deposit guarantee scheme – making compliance with the rule problematic.

"I think the practical considerations over what it is going to take to make it work for us – to really make it stick – are going to be very difficult. This is an area where we may have to see significant divergence in implementation from jurisdiction to jurisdiction," said Pieter van der Merwe, head of credit portfolio management at Absa Capital in Johannesburg.

Delegates at the conference appeared to agree, and one noted that some banks were assuming the ratio had been mothballed by the Basel Committee on Banking Supervision.

"When the NSFR was announced, we saw many firms pricing stable funding assets very aggressively to try and gather up as much of them as they could. Now it's on the backburner at the Basel Committee, this trend has abated somewhat," he said. "However, we still need to be pragmatic around pricing. The NSFR may come into force, and even if it doesn't, changing our funding towards a longer-term model is a sensible thing to do anyway."

While there was criticism of the NSFR, delegates were more enthusiastic about recent changes to the liquidity coverage ratio (LCR), another Basel liquidity measure that is designed to ensure banks have enough unencumbered, high-quality liquid assets to meet liquidity needs over a 30-day period of acute stress.

The Basel Committee initially proposed a relatively restrictive list of high-quality liquid assets, mainly limited to cash, central bank reserves and government or central bank debt issued in domestic currencies, but many banks and regulators argued there simply weren't enough outstanding government bonds in certain markets.

Regulators have made a series of modifications since the initial proposals in 2009, and in January this year widened the list of eligible assets to include equities and mortgage-backed securities. They also made an array of changes to the LCR's outflow assumptions, and introduced a phase-in period. Banks now need to meet 60% of the buffer by 2015, with 10% added every following year until the full 100% is met in 2019.

"Everyone in South Africa has realised there is a structural problem in the market. The original rules are not possible to meet. It's not a case of trying hard or doing a little bit extra – it's impossible. The gradual phase-in has certainly helped us work out how we can be more efficient in solving this problem," said Graham Bruce, head of group portfolio management at Standard Bank in Johannesburg.