Banking and Finance Law Daily Net stable funding ratio final rule approved by FDIC
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Tuesday, October 20, 2020

Net stable funding ratio final rule approved by FDIC

By John M. Pachkowski, J.D.

FDIC Board adopts NSFR final rule at its latest meeting.

The Federal Deposit Insurance Corporation’s Board of Directors, during its Oct. 20, 2020, meeting, has adopted an interagency final rule that implements the net stable funding ratio or NSFR which is a component of the Basel III reforms promoted by the Basel Committee on Banking Supervision. The interagency final rule will be issued jointly with the Office of Comptroller of the Currency and Federal Reserve Board.

The final rule will become effective July 1, 2021. An FDIC staff memorandum noted that the July 1, 2021, effective date "provides sufficient time for covered companies to take into account the new requirement and, as necessary, to make infrastructure and operational adjustments that may be required to comply with the final rule."

The NSFR is a quantitative metric that measures funding stability over a one-year time horizon and ensures certain large banking organizations maintain minimum amounts of stable funding and is intended to reduce the likelihood that disruptions to a banking organization’s regular sources of funding will compromise its liquidity position, promote effective liquidity risk management, and support its ability to provide financial intermediation.

The interagency final rule is based on a 2016 proposal issued by the FDIC, OCC, and Fed (see Banking and Finance Law Daily, April 26, 2016 and May 3, 2016). In addition, the interagency final rule finalized two regulatory proposals released subsequent to issuance of the NSFR proposed rule to revise the criteria for determining the scope of application of the NSFR requirement. These two regulatory proposals would have established a revised framework for applying prudential standards to large U.S. banking organizations and large foreign banks based on risk, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (see Banking and Finance Law Daily, Oct. 31, 2018 and April 8, 2019). The framework would establish four categories—Category I, Category II, Category III, and Catergory IV—of banking institutions with increased prudential supervision based on measures of size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposures.

Under the interagency final rule, financial institutions subject to Category I and II prudential requirements and Category III prudential requirements with $75 billion or more in average weighted short-term wholesale funding are subject to the full NSFR requirement. By contrast, banking organizations in Category III with less than $75 billion in average weighted short-term wholesale funding, or in Category IV with $50 billion or more in average weighted short-term wholesale funding, would have been required to comply with a reduced NSFR requirement, calibrated at 85 and 70 percent of the full NSFR requirement, respectively. Banking organizations in Category IV with less than $50 billion in weighted short-term wholesale funding are not subject to an NSFR requirement.

Following the meeting, Board member Martin J. Gruenberg released a statement highlighting a number of issues in the interagency final rule. He noted that the interagency final rule "would severely reduce the number of large banking organizations subject to the NSFR, it would significantly weaken the substantive requirements of the NSFR in ways that would not be compliant with the Basel Agreement, and it would provide for less timely public disclosure of the NSFR."

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