European Central Bank staff published a response to the European Commission’s call for evidence on a targeted amendment to the net stable funding ratio (NSFR) treatment of securities financing transactions (SFTs). While the Commission initiative aims to make permanent the current transitory NSFR treatment for short-term SFTs and other short-term unsecured transactions with financial customers, ECB staff support extending the current treatment for short-term SFTs backed by Level 1 collateral as a temporary measure, for example by five years, subject to a review clause. Under the Basel NSFR standard, banks apply required stable funding (RSF) factors of 10% to short-term SFT lending backed by Level 1 assets and 15% to other short-term transactions with financial customers, including unsecured transactions. The EU implementation in the Capital Requirements Regulation introduced a transitional period with lower RSF factors, including a zero RSF factor for short-term SFTs backed by Level 1 assets, including EU sovereign bonds, and RSF factors of 5% or 10% for other short-term transactions, with the transitional arrangement due to expire on 28 June 2025 absent legislative change. ECB staff note that ending the transitional treatment could increase regulatory costs and reduce SFT market depth, with potential adverse effects on liquidity distribution and government bond absorption, at a time when changes to the Eurosystem’s operational framework foresee greater reliance on SFT markets for liquidity redistribution. At the same time, the prudential and financial stability rationale for the Basel calibration, also highlighted by the European Banking Authority, remains relevant, including concerns that transitional factors may not adequately cover funding risks and that positive RSF factors can mitigate franchise risk, maturity mismatches and contagion during liquidity shocks. ECB staff propose revisiting the calibration after the Eurosystem operational framework is finalised and SFT market functioning can be reassessed alongside prudential and financial stability considerations.
European Central Bank 2025-03-07
European Central Bank staff support a temporary five-year extension of NSFR relief for short-term Level 1 collateral securities financing transactions
The European Central Bank (ECB) staff responded to the European Commission's proposal to amend the net stable funding ratio (NSFR) treatment of securities financing transactions (SFTs). While the Commission seeks to make the current transitory NSFR treatment permanent, ECB staff support a temporary extension for short-term SFTs backed by Level 1 collateral, subject to review. They caution that ending the transitional treatment could increase regulatory costs, reduce market depth, and impact liquidity distribution and government bond absorption.