Banks to swing to more stable funding

Brussels

BANKS face a push from global regulators to seek out more stable funding that won't dry up in a crisis.

Starting in 2018, internationally active banks will be required to meet a so-called net-stable funding rule that will force them to take into account the maturity of their assets when making choices about their financing mix, the Basel Committee on Banking Supervision, which brings together regulators such as the US Federal Reserve and Bank of England (BOE), said on Friday.

The rule will limit banks' reliance on "volatile short-term borrowings to fund illiquid assets", Stefan Ingves, governor of Sweden's central bank and the Basel group's chairman, said. "A key lesson from the crisis has been the need to prevent over-reliance on short-term, volatile sources of funding."

The net-stable funding ratio, or NSFR, is part of a broader overhaul of Basel banking standards in the wake of the financial crisis that toppled Lehman Brothers Holdings Inc. Regulators have said that the standard is an essential response to the failure of banks such as Northern Rock plc and Dexia SA, which were nationalised after losing short-term funding access.

The publication of the requirement means that the Basel committee "has essentially completed its regulatory reform agenda, undertaken to promote a more resilient banking sector following the financial crisis," Mr Ingves said.

Under the NSFR, different kinds of assets held by banks, such as mortgage debt, gold and some derivatives, are assigned a weighting that determines the minimum amount of stable funding that must back such investments.

Deposits, debt and other bank funding sources are also assigned weightings based on their perceived stability.

Banks had warned that a draft of the Basel group's NSFR proposal published in January would drive up the cost of equity trading, unfairly penalise them for carrying out repurchase agreements and underestimate the stability of operational deposits.

Changes in the final text, compared with the January draft version, include that regulators would be given some scope to exempt an asset on a bank's balance sheet from a stable funding requirement, if it's clear that the asset is linked to a particular funding source in a way that "the liability cannot fall due while the asset remains on the balance sheet".

The Basel group has also adjusted rules for funding short-term interbank loans, derivatives trades and assets posted as initial margin on derivatives contracts.

Out of a sample of 101 large internationally active banks, 72 per cent would have met the January version of the NSFR at the end of 2013, according to Basel data published in September. For a sample of 107 smaller banks, 83 per cent passed. The aggregate shortfall for banks that didn't meet that standard was 789 billion euros (S$1.27 trillion), according to the data.

The Basel committee brings together regulators from around 30 nations to coordinate rules for their banks. In addition to the BOE and the Fed, its members include the European Central Bank and the China Banking Regulatory Commission.

"Banks are expected to meet the NSFR on an ongoing basis," the Basel group said. The measure "should be applied to all internationally active banks on a consolidated basis", with national supervisors free to also apply it to other lenders. BLOOMBERG