NSFR Final rule outline and timelines for final implementation

NSFR Final rule outline and timelines for final implementation

By Sridhar Aiyangar, Group Head, Balance sheet and Liquidity Management, Bank ABC

Can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

Banking has become increasingly complex and intertwined with multitudes of regulatory requirements. A confluence of Risk, Treasury and Finance is essential to manage risk and optimize the Balance Sheet.

As an Executive leader with expertise in Capital, Liquidity, Risk and Portfolio management with 25+ years of experience, I bring together the multiple disciplines to create value.  My experience covers Financial Markets, Corporate Treasury, Finance and Risk Management with large MNC Banks across multiple markets. The diversity of roles and the opportunity to work with different people across different cultures enables me to bring together creative solutions. Developed and implemented tactical and strategic Balance Sheet initiatives to strengthen the overall capital, portfolio risk, funding and liquidity position.

What, for you, are the benefits of attending a conference like Liquidity Risk Management 2019 and what can attendees expect to learn from your session?

There are some clear benefits in attending conferences such as LRM. It provides an opportunity for exchange of ideas, learn from domain specialists and participants, on how they address some of their challenges, and get more conversant with the developments impacting the industry besides the obvious benefits of networking.

In your opinion, what are the main challenges institutions could face in the implementation of NSFR?

The main challenge will arise in terms of margin pressure arising from increased cost of term funding to meet the NSFR requirements. From an implementation standpoint, Banks need think about their Funds Transfer Pricing approach to differentiate assets that are NSFR intensive by charging for the cost of maintaining NSFR. Similarly, rewarding liabilities that are NSFR friendly would be necessary to differentiate and encourage the appropriate business behaviour. From a reporting perspective, Banks could face similar data challenges to the ones faced for LCR monitoring and reporting, though the reporting frequency is dis-similar.

Without giving too much away, how do you think NSFR could impact business models?

Business models that are heavily wholesale funded could find their cost of funding to rise. Banks with a strong cash management proposition and/or retail franchise would benefit.

In your opinion, what considerations should be made when looking at NSFR and the interaction with other regulations?

While LCR ensures adequacy of short-term liquidity, NSFR is about maintaining structural funding. A big drawback in the NSFR as it is currently formulated is that it does not address the liquidity risks arising from mismatch beyond one year.

What advice could you give to financial professionals looking to managing the cost of NSFR and optimise funding?

The first step in managing the cost of NSFR is to engage with the business to explain the impact of their products on NSFR and the associated costs/benefits. The Funds Transfer Pricing approach should be calibrated to reflect the characteristics of the various products to drive appropriate business behaviour.

How do you see the liquidity risk landscape evolving over the next 6-12 months?

Meeting new liquidity monitoring and reporting requirements with the increasing level of granularity and the requirements for cash flow mismatch reporting will take significant attention over the coming months.

Liquidity risk management is becoming increasingly complex with the interplay of various liquidity metrics. Scenario modelling, Dynamic Balance Sheet Management, Intraday liquidity, focus on forward looking metrics and regular Stress testing will become quintessential over the coming 6-12 months.