According to Moody’s, the Basel III disclosure standards which were finalised recently, are positive for creditors of internationally active banks because they will improve transparency into bank funding, allowing investors to assess the adequacy and reliability of funding for a bank’s least-liquid assets, including loans.
Detailed NSFR disclosure is positive for bank investors evaluating a bank’s liquidity and stable funding position since the ratio is distinct from the LCR, measuring a different type of funding risk. The LCR measures whether banks hold enough high-quality liquid assets (HQLA) that could be liquidated to cover stressed cash outflows (e.g., deposit outflows and maturing liabilities that cannot be rolled over) over a 30-day period. The NSFR measures whether funding of longer duration adequately supports less liquid longerterm assets such as loans.
The NSFR template aligns with the LCR disclosure template, which for investors provides some consistency in evaluating short- and long-term liquidity risks. Both, for example, require disclosure of stable and less stable retail deposits, and wholesale deposits used for operational purposes. These disclosures are used to calculate stressed cash outflows in the LCR, and in the NSFR are categories of available stable funding. The Basel Committee noted that in formulating the template, it balanced usability of disclosure with “undesirable dynamics during stress.” Although the Basel Committee did not specify exactly how it achieved the trade-off in the disclosure framework, this has likely restricted funding transparency to some degree.
In addition to a standardized reporting template, the NSFR disclosure standards require qualitative disclosures that are important in evaluating a bank’s stable funding position. The disclosure of interdependent assets and liabilities, which are assigned 0% required stable funding and available stable funding factors in the NSFR calculation, is key because the interdependency is judged by national discretion and could drive significant differences in ratios across banks. The disclosures also will describe drivers of changes in the NSFR categories across reporting periods, which should help investors understand how a bank’s NSFR has changed over time.
