OREANDA-NEWS. The proposed net stable funding ratio (NSFR) rule could be more challenging on the liquidity positions of large US trust/processing banks, which rely more heavily on institutional clients and core custody deposits in their liability structure, says Fitch Ratings. That said, Fitch does not expect any ratings impact from the rule and believes that all banks will reach compliance when it goes into effect in 2018.

The NSFR rule, proposed on May 3 by federal banking agencies, will apply to 15 US banks with assets in excess of USD250bn or $10bn in on-balance sheet foreign exposure. The rule requires subject institutions to maintain an NSFR of 1.0 where the numerator - available stable funding (ASF) - is defined as a weighted measure of a banks' equity and liabilities over a year.

Importantly, differing ASF weightings will be applied depending on the funding source. Regulatory capital, long-term liabilities and insured retail deposits will be assigned high ASF factors of 95-100, whereas unsecured wholesale funding including wholesale and custody deposits will only qualify for a 50 ASF factor. This will encourage banks to focus on evolving their liabilities structures and emphasize growing their retail deposit base.

Notably, the treatment of custody deposits is less favorable under the NSFR rule than under the liquidity coverage ratio (LCR) rules finalized by federal regulators in 2014. Under the LCR, uninsured custody deposits are assumed to run off by 25% (5% for insured deposits) versus the aforementioned 50 ASF factor. This could make the NSFR more restrictive than the LCR for custody banks from a liquidity rule perspective.

Banks that are already more retail oriented are less likely to face shortfalls resulting from the rule. On the other hand, trust banks with more institutional clientele that are custody deposit funded, including State Street and BNY Mellon, will find this rule more challenging.

These banks will likely manage their deposit composition more aggressively, especially when factoring in the introduction of the enhanced supplementary leverage ratio (ESLR) in 2015. The ESLR rule requires US global systemically important banks (G-SIBs) to maintain a minimum 5% ESLR at the parent company and 6% ELSR at the bank-level and is considered by Fitch to be the binding capital ratio for the trust and processing banks.

The NSFR rule will have a disproportionate effect on the trust banks versus their large retail counterparts. However, the effect should be manageable, and Fitch does not expect any significant changes to credit profiles.