Banks should be cautious if considering expanding their business, and should avoid over-reliance on wholesale funding, according to a white paper by Wolters Kluwer Financial Services.
The paper, Managing NSFR by Matching Conversion Ratios, looked in to the net stable funding ratio (NSFR), part of the Basel Committee reform, and encouraged institutions to conduct their own strategic analysis in line with the guidelines.
In the case of business expansion, it suggested that firms should develop their own retail and small business to control net funding, and highlighted the importance of sustainable funding, driven by effective asset and liability management.
According to the report, some banks struggled during the financial crisis because they failed to properly manage liquidity. The NSFR will mean banks have to maintain a stable fund profile in relation to their assets and activities, calculated by dividing available stable funding (ASF) by the required stable funding (ASF).
Banks should already analyse their fund determinants and ratios before the NSFR comes in to effect in January 2018.
Spark Wang Jun, a senior regulatory expert at Wolters Kluwer Financial Services and author of the report, said: “Sustainable funding will be of vital significance going forward, especially for the financial institutions heavily reliant on wholesale funding.”
He added: “This is a key factor to be reconsidered during the decision making for the divestment of retail business units.”
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