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APRA releases consultation package on the Net Stable Funding Ratio

Thursday 29 September 2016

 

Proposed liquid assets requirement for foreign authorised deposit-taking institutions (ADIs) also announced

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The Australian Prudential Regulation Authority (APRA) has today released for consultation a paper setting out its response to issues raised in submissions on the Discussion Paper Basel III liquidity – the Net Stable Funding Ratio and the liquid assets requirement for foreign ADIs (March 2016 discussion paper). APRA is also releasing a draft revised Prudential Standard APS 210 Liquidity (APS 210) and Prudential Practice Guide APG 210 Liquidity (APG 210) which incorporate the net stable funding ratio requirements for ADIs as well as a number of other changes as noted in the response paper.

Net Stable Funding Ratio

APRA’s objective in implementing the Net Stable Funding Ratio (NSFR) in Australia, in combination with the Liquidity Coverage Ratio (LCR) implemented in 2015, is to strengthen the resilience of ADIs. The NSFR encourages ADIs to fund their activities with more stable sources of funding on an ongoing basis, and thereby promotes greater balance sheet resilience. In particular, the NSFR should lead to reduced reliance on less-stable sources of funding - such as short-term wholesale funding - that proved problematic during the global financial crisis.

APRA’s response paper outlines modifications to some aspects of the proposed application of the NSFR in Australia in response to issues raised in submissions on the March discussion paper. In particular, APRA has modified its proposed required stable funding for certain self-securitised assets and certain higher quality liquid assets in offshore jurisdictions. In addition, the response paper provides clarification on a range of other matters raised in submissions.

APRA Chairman Wayne Byres noted that: ‘While ADIs have increased the amount of funding from more stable funding sources in recent years, the NSFR will reinforce these improvements and ensure they are sustained over the long term’.

Liquid assets requirement for foreign ADIs

The March discussion paper also set out proposals for the future application of a liquid assets requirement for foreign ADIs (i.e. foreign bank branches). Foreign ADIs are currently subject to a minimum LCR requirement of 40 per cent; the discussion paper proposed an alternative approach. Submissions on this matter raised a number of issues that suggested the alternative to the 40 per cent LCR would not be as simple as APRA intended, or necessarily lend itself to a one-size-fits-all approach. APRA is therefore proposing to retain the 40 per cent LCR as the default liquid assets requirement for foreign ADIs, but allow foreign ADIs with simpler business activities to apply to use the alternative approach.

APRA invites written submissions on the proposals in the response paper by Friday, 28 October 2016. APRA expects to release its final position on the introduction on the NSFR, and the final revised APS 210 and APG 210, in late 2016. In the coming months, APRA will be separately consulting on revised reporting requirements for ADIs related to the introduction of the NSFR and other amendments.

APRA’s current intention is that the NSFR will come into effect from 1 January 2018, in line with the internationally-agreed timetable.

The response paper can be found on APRA’s website.

Background

Q: What is the NSFR?

A: The NSFR is a quantitative global liquidity standard established by the Basel Committee on Banking Supervision that seeks to promote more stable funding of banks’ balance sheets. The standard establishes a minimum stable funding requirement based on the liquidity characteristics of an ADI’s assets and off-balance sheet activities over a one-year time horizon, and aims to ensure that long-term assets are financed with at least a minimum amount of stable funding.

Q: When will the NSFR commence?

A: Consistent with the Basel Committee on Banking Supervision’s timetable, APRA proposes that the NSFR requirements will commence on 1 January 2018.

Q: Who will the NSFR apply to?

A: APRA proposes that the NSFR will apply to those locally-incorporated ADIs that are also subject to the Liquidity Coverage Ratio (LCR). There are currently 15 LCR ADIs: AMP Bank; Arab Bank; Australia and New Zealand Banking Group; Bendigo and Adelaide Bank; Bank of China; Bank of Queensland; Citigroup; Commonwealth Bank of Australia; HSBC Bank; ING Bank; Macquarie Bank; National Australia Bank; Rabobank Australia; Suncorp-Metway; and Westpac Banking Corporation.

Q: Will ADIs that are not subject to the NSFR have to meet an alternative requirement?

A: No, there will not be an alternative requirement for other ADIs. These ADIs typically have a simpler balance sheet, primarily funded by domestic deposits. The addition of a stable funding requirement on these ADIs would not materially strengthen the prudential framework.

Basel III

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.