How to find the right balance in funding

  • Rebalancing the funding structure: Banks have taken measures to diversify their wholesale funding portfolios by strengthening their service offerings to retail clients. Furthermore, to attract retail deposits, central banks have introduced or enhanced their existing deposit guarantee schemes (DGSs) to rebuild trust, safeguard retail depositors and restore market confidence. Countries such as Australia and Singapore were new to introducing DGSs, while the US and Spain increased their current DGS limits, whereas Germany and Ireland introduced unlimited insurance coverage. The EU adopted a directive in 2009 for EU countries to introduce a DGS of a minimum of EUR50,000 and further increase it to a uniform level of EUR100,000 in the future.
  • Reducing maturity mismatches: Banks are now focused on identifying more appropriate sources of funding to manage maturity mismatches. For instance, at present, banks are minimising maturity transformation by securitising mortgages via more stable sources such as bonds and pension funds. Establishing specialised intermediaries where most of the risk is assumed directly by investors is also used as a method of reversing maturity transformation and moving long-term assets away from bank funding.
  • Deleveraging: Deleveraging strategies generally involve streamlining loan portfolios through the disposal of non-core loans and distressed property assets to achieve loans-to-deposits ratio targets. These disposal proceeds, along with any raised capital, are thereafter converted into capital buffers to be maintained and utilised in times of liquidity shock. The most significant deleveraging step taken to date is the establishment of the National Asset Management Agency (NAMA) in 2009 by the Irish government to acquire EUR74bn of bank loans from participating institutions at an average discount of 57%.
  • Regulatory improvements: With the formulation of the Basel III accord, multiple reforms have been introduced by regulators around capital, liquidity and leverage requirements. The introduction of the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) has encouraged banks to hold sufficient high-liquid assets while maintaining additional amounts of stable funding.

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