Global Regulators Close to Issuing Long-Term Liquidity Rule

WASHINGTON — Large U.S. banks are still digesting a new rule to ensure they have enough liquidity to survive a sudden crisis, but they will soon have another international liquidity standard — this one meant to strengthen long-term funding — to go with it.

Global regulators sitting on the Basel Committee announced Thursday that they had "endorsed the final details" of the Net Stable Funding Ratio and that the new standard will be released within weeks.

In a press release discussing progress on the talks, the committee said its aim is for the NSFR to take effect in 2018. Agreement on the new standard came as regulators from more than 100 countries met in China this week to discuss several Basel-related reforms.

"After many decades of trying, we now have a global liquidity standard," Stefan Ingves, governor of Sweden's central bank and chairman of the Basel Committee, said in opening remarks Wednesday to the International Conference of Banking Supervisors in Tianjin, China.

The committee said it also made progress on developing an updated list, along with the Financial Stability Board, of global systemically important banks, revising corporate governance guidance, finalizing new securitization standards and addressing "excessive variability of risk-weighted assets" in capital ratios.

The Net Stable Funding Ratio is a follow-up to the committee's previous Liquidity Coverage Ratio. The LCR — a version of which U.S. regulators implemented earlier this month — was meant to ensure banks had enough "high-quality liquid assets" to be able to cover net cash outflows over a 30-day stressed period.

The NSFR is focused on ensuring banks also have more lasting liquidity strength beyond the 30-day window. The new standard had previously been included in 2010 as part of the committee's comprehensive regulatory reforms known as Basel III, but the committee has further sought to strengthen the ratio.

In general terms, under the NSFR a bank must hold an amount of "available" stable funding that is equal to or greater than a "required" amount of stable funding. The standard also defines which instruments can be used in the numerator and denominator. Changes to the NSFR outlined in a January proposal from the committee would include clarifying how certain deposits and secured funding instruments are treated in the calculation of the ratio, and bring consistency between how "high-quality liquid assets" are defined in the new stable funding ratio and how they are defined in the LCR.

"The NSFR complements the liquidity coverage ratio... and ensures that a bank maintains a stable funding profile in relation to the composition of its assets and off-balance sheet activities," Ingves said.

U.S. regulators have been previewing the release of the NSFR among other steps planned to ensure stronger liquidity at the nation's largest banks and less reliance on short-term funding.

"The LCR does not address all risks associated with short-term wholesale funding. For example, it does not address liquidity needs beyond the 30-day horizon or the risks associated with even the largest matched repo books. There is thus still work to do in this area," Federal Reserve Board Gov. Daniel Tarullo said at a Sept. 3 meeting of the U.S. central bank, when it signed off on the LCR measure. "When completed, the Net Stable Funding Ratio should address some of these risks."

But it is unclear whether the domestic agencies would implement Basel's NSFR as is or devise a tougher standard. The Basel Committee's rules typically are what all the regulators involved with the body agree to as a floor; it is then up to home country regulators whether they want to go a step or two further.

Recently, the Federal Reserve and other U.S. agencies have favored taking a stronger approach than the Basel Committee. The domestic rules for the LCR as well as a new "supplemental leverage ratio" were both more rigorous than the version unveiled by the international body.