D4/2016: Matters Related to the Net Stable Funding Ratio

[Logo: South African Reserve Bank]
South African Reserve Bank
From the Office of the Registrar of Banks

Ref.: 15/8/3
D4/2016

2016-08-10

To: All banks, controlling companies, branches of foreign institutions, eligible institutions and auditors of banks or controlling companies

Directive issued in terms of section 6(6) of the Banks Act, 1990

Matters related to the net stable funding ratio

Executive summary

On 1 January 2013 the amended Regulations relating to Banks (the Regulations), implemented, among other things, a framework for the calculation of a bank’s net stable funding ratio (NSFR).

The Office of the Registrar of Banks (this Office) informed all relevant persons that subsequent to the implementation of the Regulations on 1 January 2013 the Basel Committee on Banking Supervision (BCBS) issued various documents related to banks’ exposure to liquidity risk, including revisions to the Basel III framework for the calculation of the minimum required NSFR. The aforementioned revisions and related NSFR requirements will be incorporated into future amendments to the Regulations.

This directive serves to inform banks, branches of foreign institutions, controlling companies and auditors of banks or controlling companies (hereinafter collectively referred to as ‘banks’) of the calibration of the NSFR and the national discretion exercised in respect of specified items related to the NSFR.

This directive also provides the reporting template to be used by banks during the monitoring period of the NSFR.

1. Introduction

1.1 On 12 December 2012 the amended Regulations were published in Government Gazette No. 35950, following which they became effective on 1 January 2013. The majority of the amendments were made to incorporate the respective requirements contained in the Basel III framework.

1.2 Subsequently the BCBS issued an updated framework for the calculation and implementation of the NSFR¹;

1.3 The NSFR framework makes provision for certain national discretion to be exercised by national supervisors.

1.4 The purpose of this directive is to:

1.4.1 Inform banks of the calibration of the NSFR and the national discretion exercised in respect of specified items related to the NSFR

1.4.2 Provide banks with the monitoring template to enable this Office to monitor banks’ readiness to comply with the NSFR requirements from 1 January 2018.

2. Framework for the calculation and implementation of the NSFR

2.1 Calibration and implementation of the NSFR

2.1.1 The NSFR framework was assessed holistically to determine the feasibility of adopting the minimum standard within South Africa and the suitability of the calibration of the NSFR for South Africa and the possible options available to incorporate the principles of the NSFR without causing undue harm to the banking sector and the economy. This Office also considered the implementation timelines and it has been decided not to deviate from the internationally agreed implementation date of 1 January 2018.

2.1.2 Available stable funding (ASF)

2.1.2.1 The calibration of ASF assumes that longer-term funding is more stable than short-term funding.

2.1.2.2 The NSFR framework assumes that regulatory capital and funding provided by retail and small business customers are the most stable sources of funding and have the highest ASF factors assigned to them.

2.1.2.3 Funding with a residual maturity of less than one year received from non-financial corporate customers, sovereigns and public-sector entities, as well as funding from financial corporate customers with a residual maturity of between six months and one year, shall be assigned an ASF factor of 50 per cent.

2.1.2.4 The NSFR framework assigns an ASF factor of zero per cent to funding with a residual maturity of less than six months from financial corporate customers. This Office is of the view that this particular calibration does not reflect the actual stability of this funding source in South Africa since there are various regulatory and economic barriers that prevent liquidity from flowing out of the domestic economy. This Office is of the opinion that these barriers cause these deposits to be more stable in South Africa compared to other jurisdictions. The barriers include, for example, the exchange

¹ Basel III: the net stable funding ratio, available at http://www.bis.org/bcbs/publ/d295.pdf

control regime that is in place, prudential requirements on financial corporates and the limited reliance on foreign-exchange funding by South African banks. The rand funding that the South African banks use is contained within the financial system and therefore the rand is unlikely to be drained by currency withdrawal from off-shore sources, or placements in off-shore accounts.

After due consideration, this Office concluded that it would be appropriate to deviate from the international standard and to assign an ASF factor of 35 per cent to secured and unsecured funding received in Rand (ZAR) from financial corporate customers, excluding banks, with a residual maturity of less than six months. This dispensation is only available for banks conducting business in South Africa.

2.2 Treatment of minimum required cash reserves

2.2.1 In terms of Banks Act Directive 7/2014 minimum required cash reserves can be included as part of HQLA in the Liquidity Coverage Ratio (LCR). The Required Stable Funding (RSF) assigned to a bank’s minimum required cash reserves shall be 5 per cent. Any excess cash reserve balances held at the South African Reserve Bank, in the relevant reserve account, shall be assigned an RSF factor of zero per cent.

2.3 Interdependent assets and liabilities

2.3.1 The NSFR framework sets out the principles for interdependent assets and liabilities that would qualify for the beneficial treatment. For banks to benefit from this treatment it would be subject to supervisory approval following due consideration by the internal governance structures of the bank. As a minimum, interdependent assets and liabilities shall be approved by the executive committee assigned responsibility for liquidity risk management oversight within the relevant bank.

2.4 The following contingent funding obligations are included in the NSFR framework:

2.4.1 Unconditionally revocable credit and liquidity facilities shall be assigned a RSF factor of 5 per cent;

2.4.2 Trade finance-related obligations (including guarantees and letters of credit) shall be assigned a RSF factor of 5 per cent;

2.4.3 Guarantees and letters of credit unrelated to trade finance obligations shall be assigned a RSF factor of 5 per cent; and

2.4.4 Non-contractual obligations such as:

2.4.4.1 potential requests for debt repurchases of the bank’s own debt or that of related conduits, securities investment vehicles and other such financing facilities,

2.4.4.2 structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes, and

2.4.4.3 managed funds that are marketed with the objective of maintaining a stable value

shall all be assigned a RSF factor of zero per cent.

2.4.5 Required stable funding (RSF)

2.4.5.1 The RSF takes into account the need for resilient credit extension, bank behaviour, liquidity value, asset tenor and asset quality. This Office is of the opinion that the RSF factors set out in the NSFR framework are appropriate and shall be implemented accordingly by banks.

2.5 A summary of the specific ASF factors are set out in Annexure B.

2.6 A summary of the specific RSF factors are set out in Annexure C.

3. Directive

3.1 Based on the aforesaid, and in accordance with the provisions of section 6(6) of the Banks Act, 1990, banks are hereby directed:

3.2 to monitor their readiness to comply with the revised NSFR framework and the related requirements, as published by the BCBS in the aforementioned documents, read with the relevant requirements specified in the Regulations and in this Directive, during the compliance monitoring stages of the internationally agreed liquidity standards up to 31 December 2017;

3.3 to comply with the revised NSFR framework and the related requirements, as published by the BCBS in the aforementioned documents, read with the relevant requirements specified in the Regulations and in this Directive, from 1 January 2018, onwards;

3.4 to furnish this Office with the information related to the NSFR, in accordance with requirements specified in the NSFR monitoring template set out in Annexure A. The template should be sent to SARB-BANKSUP@resbank.co.za on a monthly basis within 20 business days immediately following the month-end to which the specified return relates from the August 2016 reporting period onwards.

4. Acknowledgement of receipt

Two additional copies of this directive are enclosed for the use of your institution’s independent auditors. The attached acknowledgement of receipt, duly completed and signed by both the chief executive officer of the institution and the said auditors, should be returned to this Office at the earliest convenience of the aforementioned signatories.

[Signature]
Kuben Naidoo
Deputy Governor and Registrar of Banks
16/8/2016
Encl. 3

The previous directive issued was Directive 3/2016, dated 16 May 2016.

Annexure A

[Table omitted for brevity, contains the NSFR reporting template structure]

Annexure B

Summary of liability categories and associated ASF factors

ASF factor	Components of ASF category
100%	• Total regulatory capital (excluding Tier 2 instruments with residual maturity of less than one year)
	• Other capital instruments and liabilities with effective residual maturity of one year or more
95%	• Stable non-maturity (demand) deposits and term deposits with residual maturity of less than one year provided by retail and small business customers
90%	• Less stable non-maturity and/or term deposits from retail and small business customers
50%	• Funding with residual maturity of less than one year provided by non-financial corporate customers
	• Operational deposits
	• Funding with residual maturity of less than one year from sovereigns, PSEs, and multilateral and national development banks
35%	• Rand funding with a residual maturity of less than six months from financial corporate customers (excluding banks)
0%	• All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests)
	• NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets
	• “Trade date” payables arising from purchases of financial instruments, foreign currencies and commodities

Annexure C

Summary of asset categories and associated RSF factors

RSF factor	Components of RSF category
0%	• Coins and banknotes
	• Central reserves in excess of the minimum required central bank reserves
	• All claims on central banks with residual maturities of less than six months
	• “Trade date” receivables arising from sales of financial instruments, foreign currencies and commodities.
5%	• Minimum required central bank reserves
	• The current undrawn portion of irrevocable and conditionally revocable credit and liquidity facilities to any client
10%	• Unencumbered Level 1 assets, excluding coins, banknotes and excess central bank reserves
	• Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets as defined in LCR paragraph 50, and where the bank has the ability to freely re-hypothecate the received collateral for the life of the loan
15%	• All other unencumbered loans to financial institutions with residual maturities of less than six months not included in the above categories
	• Unencumbered Level 2A assets
50%	• Unencumbered Level 2B assets
	• HQLA encumbered for a period of six months or more and less than one year
	• Loans to financial institutions and central banks with residual maturities between six months and less than one year
	• Deposits held at other financial institutions for operational purposes
	• All other assets not included in the above categories with residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns and PSEs
65%	• Unencumbered residential mortgages with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the Standardised Approach
	• Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the standardised approach
85%	• Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP
	• Other unencumbered performing loans with risk weights greater than 35% under the standardised approach and residual maturities of one year or more, excluding loans to financial institutions
	• Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of one year or more and exchange-traded equities
	• Physical traded commodities, including gold
100%	• All assets that are encumbered for a period of one year or more
	• NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative assets are greater than NSFR derivative liabilities
	• 20% of derivative liabilities as calculated according to paragraph 19 of the NSFR framework
	• All other assets not included in the above categories, including non-performing loans, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities
REF factors subject to national discretion	• Unconditionally revocable credit and liquidity facilities
	• Trade finance-related obligations (including guarantees and letters of credit)
	• Guarantees and letters of credit unrelated to trade finance obligations
	• Non-contractual obligations such as:
	o potential requests for debt repurchases of the bank’s own debt or that of related conduits, securities investment vehicles and other such financing facilities
	o structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs)
	o managed funds that are marketed with the objective of maintaining a stable value