RBI Draft Guidelines on Net Stable Funding Ratio/NSFR: Outline

RBI Draft Guidelines on Net Stable Funding Ratio/NSFR: Outline

Question: Funding is an essential component of effective functioning of banks. Provide an outline of the draft guidelines on Net Stable Funding Ratio under Basel III framework issued recently by the RBI.

• RBI has released draft guidelines on Net Stable Funding Ratio under the Basel III framework on liquidity standards for banks

• NSFR attains the following:

- Limiting excessive dependance on short-term wholesale funding,
- Encouraging better assessment of funding risk across all on and off-balance sheet items
- Promoting funding stability

• NSFR will be applicable for Indian banks from January 1st, 2018 and it will apply for domestic banks at individual as well as consolidated level

• For foreign banks operating as branches in the nation, framework is applicable on standalone basis for present operations only

Major Highlights

The major highlights of the draft guidelines are as follows:

Minimum Capital Requirements

• Common Equity Tier 1 (CET1) capital should be at least 5.5 percent of risk-weighted assets/RWAs
• Tier 1 capital must equal at least 7 percent of RWAs; and
• Total capital must be at least 9 percent of RWAs.

Capital Conservation Buffer

• The capital conservation buffer in the form of Common Equity of 2.5% of RWAs.
Transitional Arrangements
• Implementation period of minimum capital requirements and deductions from Common Equity will commence from January 1, 2013 and be completely implemented as on March 31st, 2017.
• Capital conservation buffer requirement is to be implemented between March 31st, 2014 and 2017
• Instruments no longer qualifying as regulatory capital instruments will be phased-out in the period commencing from January 1st, 2013 to March 31st, 2022.

Enhancing Risk Coverage

• For OTC derivatives, along with the capital charge for counterparty default risk under Current Exposure Method/CEM, banks are needed to compute additional credit value adjustments (CVA) risk capital charge.

Leverage Ratio

• The parallel run for the leverage ratio will be commence from January 1st, 2013 to 2017, in a period during which banks would be expected to attempt to operate at a minimum Tier 1 leverage ratio of 5%. Leverage ratio requirement will take the final proposal of the Basel Committee into account

Facts and Stats

• The NSFR is the amount of available stable funding relative to the amount of required stable funding.

• Objective of NFSR is ensuring the maintenance of a stable funding profile in relation to composition of assets and off-balance sheet activities.

• Basel Committee on Banking Supervision released the final rules on the NSFR in October 2014.

• RBI has stressed on a sustainable funding structure for banks as per this draft guideline