The comment period for the Net Stable Funding Ratio (NSFR) proposal from the Bank for International Settlements Basel III reforms is Friday, April 11. And while among banks some in trade finance will shrug, others in the repo business are bracing for what could be either the demise of the repo market or at least a serious curtailing of it.
According to the BIS, the NSFR requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. When first proposed this rule called for a broad, 100 percent credit conversion factor to all off-balance sheet activities. This meant any off-balance sheet activity from plain vanilla letters of credit to complex derivatives.
For those in the growing trade finance sector, such a rule would have had a chilling effect, raising the price of global trade and possibly slowing down an already struggling world economy. However, the BIS in January amended its rules for the leverage ratio (see related story here), lowering the conversion factor by reducing the extent to which certain off-balance sheet exposures are brought back on to the balance sheet. This was good news for trade finance, although the sector isn’t completely out of the woods, as, according to the BIS draft, for some activities like trade finance and letters of credit fall under the category of: “National supervisors can specify the RSF [required stable funding] factors based on their national circumstances.” So if the likes of Fed Governor Daniel Tarullo think it’s too big a risk or a systemic one, supervisors could come up with their own funding ratio.
Meanwhile for repo it’s a different story and possibly a bad one at that. According to Risk.net, “the cost of some repo transactions would leap 850 percent under a draft version of the NSFR.” That’s because lenders “would be required to hold term funding equal to half the size of some transactions.” Risk quotes Maureen Coen, fixed-income treasurer at Credit Suisse in New York, who said that banks currently chart overnight 7 basis points for overnight repo. However, she said, that could pop to 67 basis points if term funding is required for half the notional value. She estimates that could add up to 60bp to the transaction’s cost. Of course, most that increase would be passed along to end-users, she said.
The BIS is taking comments for the proposal until April 11. Comments can be uploaded here.