The Required Stable Funding (RSF) Factoring Methodology

The amount of required stable funding is found by evaluating the stability and liquidity risk of a bank’s assets and its off-balance sheet exposures. The proportion of each particular asset that will have to be funded within a 1-year timeframe is then approximated by an RSF factor. This could be due to roll-over, illiquidity in asset markets or because posting the asset as collateral in a secured borrowing transaction would incur large costs.

Below, we show a summary of the RSF factoring methodology.

RSF FACTOR Assets included in RSF classification

0% - Coins and banknotes

- All types of central bank reserves

- All claims on central bank reserves with residual maturities of less than six months - ‘Trade data’ receivables arising from sales of financial instruments, foreign currencies

and commodities

5% - Unencumbered level 1 assets, excluding coins, banknotes and central bank reserves 15% - All other types of unencumbered loans to financial institutions with residual

maturities less than six months not included in the above categories - Unencumbered level 2A assets

50% - Unencumbered level 2B assets

- HQLA encumbered for a period of six months or more and less than one year - Loans to financial institutions and central banks with residual maturities between six

months and one year

- Deposits held at other financial institutions for operational purposes

- All other assets not included in above categories with residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns and PSEs

65% - Unencumbered residential mortgages with a residual maturity of at least one year with a risk weight of at maximum 35 % under the standardized Basel II approach - Other unencumbered loans not included in the above categories, excluding loans to

financial institutions, with a residual maturity of at least one year and a risk weight of at maximum 35% under the Basel II approach

85% - Cash, securities or other types of assets posted as initial margin for derivative

contracts and cash or other assets provided to contribute to the default fund of a CCP - Other unencumbered performing loans with risk weights greater than 35 % under the

standardized Basel II approach, and with residual maturities of at least one year,

- Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of one year or more and exchange-traded equities

- Physical traded commodities, including gold

100% - All assets that are encumbered for a period of at least one year

- NSFR derivative assets net of NSFR derivative liabilities, if the NSFR derivative assets are greater than the NSFR liabilities, (otherwise 0%)

- 20 % of derivative liabilities as calculated according to paragraph 19

- All other assets not included in the above categories, including non-performing loans, loans to financial institutions with a residual maturity of more than one year, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets subsidiary interests and defaulted securities

Table 5: RSF allocation overview for NSFR calculation

Below, we will briefly provide some context and comments for each of these factors.

Encumbered assets

First of all, the matter of encumbered assets is defined in LCR paragraph 31: “’Unencumbered’

means free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell, transfer, or assign the asset. An unencumbered asset should not be pledged (either explicitly or implicitly) to secure, collateralize or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries)”. A natural consequence of assets being unencumbered is that it limits the flexibility and liquidity of the asset, and thus we must take this into account when calculating the RSF. In regards to the RSF; a 100% factor will be applied to those assets on the balance sheet that are encumbered for one year or more. If the asset is encumbered for less than one year but above six months, the factor will be 50%, and it will be 0% for those assets encumbered for less than six months.

RSF 0 % factor assets

A 0% RSF factor is reserved for only the most liquid of assets, reflecting the fact that they can immediately be used to meet an impending obligation.

RSF 5 % factor assets

This category is mainly dominated by marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, BIS, IMF, ECB, the European Community, or multilateral development banks that are assigned a 0% risk weight under the Basel II standardized approach.

This is the case since these assets are proven to be a very reliable source of liquidity in the

financial markets, even in extreme stress scenarios. Finally, certain non-0% risk-weighted sovereign or central bank debt securities as specified in the LCR are also included here.

RSF 10 % factor assets

The unencumbered loans in this category must be secured against level 1 assets, such as coins, banknotes, and central bank reserves.

RSF 15 % factor assets

Level 2A assets were defined in the LCR part of this methodology section, and assets classifying for a 15% RSF factor follow the same LCR framework.

RSF 50 % factor assets

The 50% RSF factor comprises the largest and most diverse group of assets. Level 2B assets were defined in the LCR part of this methodology section.

RSF 65 % factor assets

The Basel III standardized approach is related to the calculations of credit risk.

RSF 85 % factor assets

Should it be the case that securities or other assets used as initial margin in derivative contracts would otherwise receive a higher RSF factor, they should retain that higher factor. The Basel Committee will continually address this issue in the context of NSFR through quantitative analyses, as the regulatory requirements of margining and settlement of derivatives become implemented and their consequences become clearer.

RSF 100 % factor assets

The Basel III NSFR framework, puts forth the approach to calculate the amount of NSFR derivatives assets (specifically paragraphs 34 and 35) net of derivative liabilities (specifically paragraphs 19 and 20). Derivative asset amounts are calculated based on the replacement cost for derivative contracts when these has a positive value. Collateral received in connection with derivative contracts may not offset the positive replacement cost amount. Derivative liability amounts are calculated are calculated based on the replacement cost for derivative contracts when these have

a negative value. When it comes to the derivative liabilities, collateral posted in the form of variation margin must be deducted from the negative replacement cost amount.