How the Net Stable Funding Ratio Impacts Corporate Treasury
The net stable funding ratio (“NSFR”) is one of the remaining Basel III reforms. In short, the NSFR requires banks to maintain a stable funding profile in relation to their assets and off-balance sheet activities.
The immediate impact will be two-fold: (1) the long-term funding costs required under the NSFR limit will discourage dealer involvement in derivatives and derivatives-related transactions, effectively reducing liquidity in the market that end-users rely on to hedge risk; and (2) costs associated with capital-raising in a less liquid market would inevitably be borne by derivatives end-users and consumers. In fact, there are specific “add-on” charges for corporate end-users, especially with respect to derivatives. For example, dealer counterparties are required provide required stable funding for 20% of the negative replacement cost of derivative liabilities (before deducting variation margin posted). This is essentially a 20% “tax” on a derivatives trade, even if a bank has a stable funding profile before the 20% add-on. This webinar focuses on these issues and suggest ways that they could be changed.