The NSFR, real questioning of the role of the bank?

In February 2011, Patrick Artus, chief economist at Natixis, took issue with the current definition of NSFR ("Net Stable Funding Ratio") by calling it "absurd ratio."

It is also far from being alone in the challenge. Indeed, while this ratio is designed to ensure stable liquidity of financial institutions, number of players in the banking question its "calibration" current, likely in the traditional role of processing devoted to banks.

Let us first on the Basel III, published December 16, 2010. These are proposals at this stage of banking regulations, subject to an observation period to adapt their calibration, and to improve the coverage of systemic risks and to ensure that financial institutions have reserves and funds own quality and sufficient quantity. This should allow to deal with liquidity crises, like that which followed the fall of Lheman Brothers or the current crisis related to sovereign debt. By the introduction of two new "liquidity ratios" shown below, Basel III aims to further regulate the management of liquidity and prevent the impacts generated by the various crises:

•     The "LCR" (Liquidity Coverage Ratio), a ratio very short term forcing banks to hold a stock of liquid assets (not readily marketable and risky) to offset cash outflows in a crisis over a period of one month
  
  
•     The "NSFR" ratio in the medium term (one year), as we detail below.

The NSFR: definition of a ratio very controversial

In general, the NSFR ensures that the institution has sufficient resources "stable" (that is to say the resources of maturity of over one year), as opposed to short-term resources to finance its assets medium / long term. For this, the amount of stable employment (RSF: Stable Funding Required) must be less than the amount of stable resources available to the facility (ASF: Stable Funding Available).

The NSFR implies that the offices of the bank's liabilities (eg deposits) component stable resources (ASF) are weighted so according to their decreasing stability in one-year horizon, the weighting depends mainly on the type of product but also the consideration of: 100% for capital and debt with a residual maturity greater than one year at 0% for deposits of financial institutions, highly penalized by the NSFR.

As the needs stable funding (RSF), they consist of balance sheet assets, using a weighting variable defined by the regulator based on their liquidity (eg, while 100% of outstanding loans and residential real estate out of maturity than one year require a stable funding, the percentage increases to 85% if the maturity is less than one year). This reflects the ability of the bank to dispose of under a year.

Eventually, the NSFR will be calculated at a minimum once every quarter within 15 days of the order. At this point, the indicator remains under observation period with the possibility of making adjustments until mid-2016. To assess whether these measures of liquidity are tailored to the needs, the supervisor has launched a quantitative impact study (QIS [2]), to be reflected in particular by publishing a report on the NSFR for an implementation from January 2018. Financial institutions are already preparing for these changes, not without dissatisfaction with the impact of the ratio of their activity.

The impact of NSFR on the traditional role of banks

A first level of analysis suggests, however suggests that this ratio provides guarantees for the sector: it involves increasing the share of liquid assets that are easily transferable or diversification of funding sources. This results in reducing the risk of dependence, which can be dangerous in the context of a liquidity crisis. For example, the ratio does not account for prolonged use of institutions lending facilities of central banks.

Moreover, the NSFR pushes institutions to increase the share of assets financed by long-term resources. It promotes a greater adequacy between the maturity of the assets of the facility and the refinancing of its own. That is why this ratio more confined the use of short-term resources to finance current assets, less remunerative. And vice versa, to finance assets over the medium and long term (like mortgages), banks will be forced to use largely long-term resources naturally more expensive (eg savings products at attractive rates) and least de facto generating margin. This is one reason why the NSFR remains highly controversial by the leaders of financial institutions and even by the European Commission, which decided for the moment, not to impose its CRD4 European Directive , did not think it "ready".

Criticism of the NSFR and its future

First, it is the same ratio calibration is discussed: "the definition of liquidity ratio proposed by the Basel Committee as part of the reform of banking regulation is too restrictive and impractical," said the Executive Director of the French Banking Federation (FBF) Ariane Obolensky. The calculation of standardized NSFR is based on assumptions of "stress" extremely severe. In addition, it lists the main balance sheet items on a limited basis and assigns a weight, representing the share to refinance, more or less arbitrary. For example, the NSFR gold weights to 50% while it is a perfectly liquid asset for 50 years. These weights should thus forcing banks to give up or focus on certain products and activities and deprive them of independence in strategy.

Moreover, it is truly the original role of intermediation and transformation of the banks and its calibration NSFR challenge: collect cash savings (individuals or companies) providing resources for the bank and short-term turn them into long-term assets (loans to customers, bond purchases ...). This contrasts with the NSFR which induces the transformation of long-term resources in financing long or short of resources in financing short. This development could result in different ways:

•     The mass issuance of long-term bonds: banks in the euro area should make for about $ 1.8 trillion according to initial estimates by Patrick Artus.
•     The possible rise in interest rates on loans to cover the increased costs of liquidity with long maturities: increase rates would have a direct impact on the number of credits and logically on GDP growth. Indeed, Basel III would cost six points of growth in Europe, according to John Lawrence Bonnafe, CEO of BNP Paribas.
•     Increased securitization of receivables, one of the causes of contagion of the crisis of 2008: this practice will allow banks to get these loans off their balance sheets to prevent them from refinancing with long-term resources.
•     The significant reduction in grants business loans, loans on residential real estate being more favorably weighted.
•     Race deposits: banks will have to expand their business (by creating new products, like the new Savings Booklet More Societe Generale, which grants a bonus beyond 6 months and has already helped raise 1 billion euros, or renovating existing products such as deposit accounts CAT [8]) and retain their customers through higher-paying accounts. This quest will cost deposits for financial institutions that they could probably pass, again, increasing the cost of credit.
  

System stability, the first priority

The Basel III is likely to introduce significant changes in activity of banks and their role in transforming the traditional short-term long-term.

"The problem is that it is easier to quantify the costs of a measure that his earnings," describes Gunther Capelle-Blancard, an economist at CEPII. In this case, the gain is significant: since this is the stability of the banking system. “Indeed, the primary purpose of these reforms is to strengthen the stability of the banking system to ensure greater security and regain lost trust.

However, despite a genuine desire for change, it remains difficult at this stage to determine the most appropriate solution to liquidity problems, as revealed by the application of NSFR planned for 2018...!