Agencies Finalize Long-Term Liquidity Calculation, Disclosure

The federal banking agencies today finalized the Net Stable Funding Ratio, a long-term liquidity measurement that was the last major unfinished element of the Basel III liquidity standards. The NSFR—which is being issued by the three prudential bank regulators—is designed to complement the Liquidity Coverage Ratio, a measure of cash flow over a 30-day stress period.

Conceptually, the NSFR remains similar to the proposal, consisting of a firm’s amount of available stable funding over a year divided by the institution’s required stable funding, with the numerator required to equal or exceed the denominator. The rule assigns factors to different forms of funding based on their perceived level of stability. The final rule contains many American Bankers Association-advocated changes, including better alignment with the assumptions in the LCR. However, ABA continues to urge the banking agencies to ensure that the liquidity standards are properly calibrated for U.S. markets and institutions.

The final NSFR applies to institutions based on the tailored regulatory framework for large banking organizations introduced after the NSFR was proposed. Category I and II firms, as well as certain Category III firms, will be subject to the full NSFR, as will these firms’ subsidiary banks with over $10 billion in assets and U.S. intermediate holding companies with $100 billion or more in total consolidated assets. Other category III firms will be subject to an 85% NSFR, and certain Category IV firms will be subject to a 70% NSFR.

Covered bank holding companies will be required to disclose their NSFR based on a simple daily average reported in the second and fourth calendar-year quarters for each of the two preceding quarters. A firm’s NSFR disclosure is set for the first calendar quarter that includes the date 18 months after the firm becomes subject to the NSFR. For currently covered firms, the NSFR takes effect on July 1, 2021.