Assessment of inherent funding risk

Competent authorities should assess the appropriateness of the institution’s funding profile, including both medium- and long-term contractual and behavioural mismatches, in relation to its business model, strategy and risk appetite. They should take into account whether the institution’s medium- and long-term assets and off-balance-sheet items are adequately met with a range of stable funding instruments, pursuant to Article 413 of Regulation (EU) No 575/2013. Competent authorities should support this assessment by analysing the NSFR as specified in Title IV of Part Six of Regulation (EU) No 575/2013 and assess whether this has been correctly reported.

Competent authorities should consider the impact on the institution’s funding profile of any (local) regulatory and contractual factors affecting the behavioural characteristics of funding providers (e.g. regulations regarding clearing, bail-in, deposit guarantee schemes, as they may influence the behaviour of funding providers).

Competent authorities should assess whether potential shortcomings arising from the institution’s funding profile, such as maturity mismatches breaching acceptable boundaries, excessive concentrations of funding sources, excessive levels of asset encumbrance, or inappropriate or unstable funding of long-term assets could lead to an unacceptable increase in the cost of funding and a loss of funding access for the institution. In particular, assumptions regarding the stickiness of funding attracted via channels that rely on fintech or are less traditional for example online deposit platforms – need to be closely assessed when planning or designing stress scenarios.

Competent authorities should consider factors that may reduce the stability of the funding profile in relation to the type and characteristics of assets, off-balance-sheet items and liabilities. They should take into account the structural maturity mismatch between assets and liabilities (including the impact of any currency mismatches), appropriate structural funding metrics (e.g. loan/deposit ratio, customer funding gap and behaviourally adjusted maturity ladder), and funding characteristics that could indicate increased ML/TF risks and concerns from a prudential perspective. Competent authorities should also consider impact of losses on the stability of funding; knowing that funding providers may be sensitive to much lower losses than those that would endanger capital ratios.

Competent authorities should assess risks to the sustainability of the funding profile arising from concentrations in funding sources (particularly in the type of funding instruments used, specific funding markets, single or connected counterparties). For example, they should consider the characteristics of the most material sectors serviced by the institution and how this impacts the institution’s funding risk profile, paying particular attention to exposures to cyclical or volatile sectors.

Competent authorities should also assess the risk that asset encumbrance may have an adverse effect on the market’s appetite for the unsecured debt of the institution (in the context of the specific characteristics of the market(s) in which the institution operates and the institution’s business model).

Competent authorities should be aware of the institution’s actual market access and current and future threats to this market access including disruptions in the access to foreign exchange markets (including idiosyncratic). For the assessment, they should take into account the degree to which the institution makes high demands on particular markets or counterparties (including central banks) relative to those markets’/counterparties’ capacity, any significant or unexpected changes in the issuance of debt, the risk that news about the institution may negatively influence the market (perception/confidence) and therefore market access, and signs that short-term liquidity risks may reduce the access the institution has to its major funding markets.

Competent authorities should assess the expected change in funding risks based on the institution’s funding plan and form a view on the feasibility of the plan (such as backtesting, considering alternative scenarios).