APRA releases consultation package on Net Stable Funding Ratio

Proposed liquid assets requirements for foreign ADIs also announced

The Australian Prudential Regulation Authority (APRA) has today released for consultation a discussion paper outlining its proposed implementation of the Net Stable Funding Ratio (NSFR). It is proposed that the new standard would come into effect from 1 January 2018, consistent with the international timetable agreed by the Basel Committee on Banking Supervision (BCBS).

The discussion paper also proposes options for the future operation of a liquid assets requirement for foreign authorised deposit-taking institutions (ADIs), i.e. foreign bank branches, in Australia.

APRA originally consulted on proposals for the introduction of the NSFR in 2011, but subsequently placed further consultation on hold pending finalisation of the NSFR by the BCBS, which released details of its final NSFR standard in October 2014.

APRA’s objective in implementing the 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.

As with the earlier introduction of the LCR, APRA is proposing that the NSFR will only be applied to larger, more complex ADIs.1 Smaller ADIs with balance sheets that comprise predominantly mortgage lending portfolios funded by retail deposits are likely to have stable funding well in excess of that required by the NSFR, meaning there is limited value in applying the new standard to these entities.

APRA Chairman Wayne Byres said: ‘ADIs have increased the amount of funding from more stable funding sources over the past seven years or so, reflecting an important lesson from the financial crisis as to the need for greater liquidity and funding resilience.

‘The NSFR will serve to reinforce and maintain those improvements in ADI funding profiles. It will also be an important consideration, in addition to capital strength, when determining how to implement the Financial System Inquiry’s recommendation regarding ‘unquestionably strong’ ADIs.’

Liquid assets requirement for foreign bank branches

The discussion paper also sets out proposals for the future application of a liquid assets requirement for foreign bank branches that are currently subject to a concessionary 40 per cent LCR requirement. APRA is consulting on two options: (i) the continuation of the existing regime or (ii) replacing the existing regime with a simple metric that would require foreign bank branches to hold specified liquid assets equal to at least nine per cent of external liabilities.

APRA invites written submissions on the proposals in the discussion paper by 31 May 2016. APRA intends to release a draft revised prudential standard, and an associated prudential practice guide, for consultation later in 2016. This will be followed by revised draft reporting requirements during the second half of 2016.

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

1 APRA is currently proposing that 15 ADIs be subject to the NSFR. They are: 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.