Background – Basel III NSFR
Continuing with the concept of Liquidity Risk Management and the recommendations arising from the new standards set via the Basel III framework, the NSFR or “Net Stable Funding Ratio”, which officially came into effect during 2018, encourages banks to employ a more stable funding structure over the medium to long term, allowing them to reduce maturity transformation risk on their balance sheets.
CFEN – Adapation to the colombian market.
Just as the Colombian Financial Regulator, the SFC developed and implemented the IRL or Liquidity Risk Index as a substitute for the LCR (Liquidity Coverage Ratio), so the CFEN (Net Stable Funding Ratio) appears to act as proxy for Basel III’s NSFR. Just as with the NSFR, the CFEN seeks to calculate liquidity risk over a longer time horizon, incorporating the entire balance sheet in its calculation. It seeks to encourage a stricter control of the entity’s maturity transformation business, promoting long term funding as well as an improvement in asset quality. Below we explain the most important concepts regarding the calculation of the CFEN:
The general concept of the CFEN is very similar to that of the Basel III NSFR:
- Define the amount of “adjusted” available stable funding available.
- Define the amount of “adjusted” required stable funding available
- Divide the results to obtain the CFEN.
FED – Available Stable Funding
The numerator of the CFEN is called FED or Available Stable Funding. This figure is calculated by taking each liability and capital accounting concept and multiplying it by a factor which reflects its relative stability in funding terms within the balance sheet, for example:
|Bonds maturing > 1 yr.||100%|
|Term Deposits maturing ≥ 1yr.||100%|
|Wholesale Funding > 1yr.||100%|
|Term Deposits < 6m.||95%|
|6m < Loans < 1yr.||50%|
|Foreign Wholesale Sight Deposits||50%|
|Loans < 6m||0%|
As can be observed from the above examples, the stability factor depends principally on the maturity date of the liability and on the probability that the creditor renews the deposit, or in the case of non-maturing liabilities, that the customer withdraws their deposit. A 0% stability factor is applied to other liabilities such as deferred taxes and derivatives as they are not considered as stable funding.
FER – Required Stable Funding
The denominator of the CFEN is FER or Required Stable Funding. This calculation represents the sum of the “adjusted” balances of all assets on the balance sheet. Each concept is multiplied by a factor which reflects, on the one hand, its level of liquidity (in the case marketable securities) and on the other hand the probability that the entity actually receives the funds on the stipulated date, for example:
|Cash & Equivalents||0%|
|Long Term Liquid Assets > AA- or Short-Term Investment Grade||15%|
|Long Term Liquid Assets > A+ or Short-Term Unclassified||50%|
|Secured Loans < 6m||10%|
|Retail Loans < 1yr||50%|
|Mortgage Loans > 1yr||85%|
|Past due Loans||100%|
Other assets such as deferred tax assets and non-maturing assets (eg fixed assets) require a 100% factor.
By dividing FED by FER, we obtain the CFEN ratio for the entity.
The generic CFEN should be reported to the SFC (Colombian Financial Authority, in spanish) on a monthly basis. Nevertheless, the entity should be proactive with regards to the management of its long-term liquidity structure, ensuring that additional internal rules and regulation are in place. All balances included in the calculations of both FED and FER should be calculated based on book value with the exception of financial derivatives (fair value).
Note: At Mirai we recommend MAT, our taylor-made end-to-end ALM tool. MAT allows our clients to generate future balance sheet cash flows at contract level, the results of which can be used to create the regulatory CFEN report. For more information contact us via https://www.miraialmtool.com/en.