April 11, 2014
Comments on the Basel Committee on Banking Supervision’s Consultative Document:
Basel III: The Net Stable Funding Ratio
Japanese Bankers Association
We, the Japanese Bankers Association, would like to express our gratitude for this opportunity tocomment on the consultative document: Basel III: The Net Stable Funding Ratio, released onJanuary 12, 2014 by the Basel Committee on Banking Supervision (the “BCBS”).
We hope that our comments below will be of assistance and offer an additional point of reference
as you work towards finalising the framework.

General comments
 NSFR should be appropriately designed so as not to undermine the functioning ofessential products and markets for the economy.
While the proposed NSFR is designed based on multiple assumptions, thoroughconsideration should be given to ensure an appropriate balance in assigning ASF and RSF
factors so as not to undermine the functioning of products and funding markets which areessential for the economy.
We understand from the Consultative Document that the BCBS reviewed the NSFR toestablish a more general ratio measuring a structural balance of banks’ assets and liabilities,
which does not assume specific stress conditions. Although there are some explanations ongrounds for ASF and RSF factors, the Consultative Document only provides several abstract
underlying criteria for the assignment of factors (Paragraphs 12 and 13). For instance, it ispresumed that factors are designed on business-as-usual basis from one of the criteria set out
in Paragraph 13(b) (“banks may seek to roll over a significant proportion of maturing loans
to preserve customer relationship”). On the other hand, there are some RSF factors which
are assigned in a conservative manner assuming severe stress conditions. It is not specifiedto what extent such criteria were taken into account in assigning each ASF/RSF factor.
As discussed in the “Specific Comments” section below, there are some cases where
specific criteria/assumptions appear to be reflected in the ASF/RSF assignment more than
the reality, as well as the cases where ASF and RSF factors for certain transactions areasymmetrical. We respectfully request that the BCBS will continue thorough discussions
and open dialogue with industry so that NSFR will become an appropriate incentive for1

banks’ operations and contribute to the financial system stability.
Specific Comments
 Loans to central banks with residual maturity of less than six months should beassigned a 0% RSF factor (Paragraph 22 (a), Paragraph 32(e)).
NSFR should not include a factor which may disincentivise banks to respond to central
banks’ specific monetary control measures 1 . Under the Consultative Document, if thecentral bank executes fund absorption operations through repo transactions (i.e. from thebank’s perspective, reverse repos executed with the central bank), such transactions aredeemed as loans to the central bank and are assigned a 50% RSF factor. A 0% RSF factor
should apply instead so as not to reduce banks’ incentive to respond to the central banks’operations using repos, repurchase agreements or resale agreements.
 Deposits from central banks in other jurisdictions with residual maturities of less than
one year (excluding central bank operations) should be assigned a 50% ASF factor,
in-line with funding from sovereigns and public sector entities (Paragraph 21 (c)).
Under the LCR, the outflow rate applied to deposits from central banks is the same as theone applied to deposits from sovereigns and public sector entities (the highest outflow rate
is 40%). Applying a 0% ASF factor to deposits from central banks with residual maturity ofless than six months under the NSFR is considered overly conservative in relation to theLCR, which does not assume a 100% outflow even in its severe stress period.
If the proposed ASF is the result of taking the neutrality with central banks’ monetary
operations into account, a 50% ASF factor, that is applied to the funding from sovereigns
and public sector entities, should also be applied to the funding from central banks which isdeemed as unrelated to the fund supply operations2. Similarly to deposits from non-financial
corporations, it is difficult for banks to control deposits from central banks, and hence banks
would not rely on deposits from central banks intentionally.
 The treatment of money market instruments issued by banks (e.g. CDs) with residual
maturities of less than six months should be reconsidered (Paragraph 29(c), Paragraph32(e)).
Money market instruments, including CDs, are conceived to be assigned a 50% RSF factor
in line with Paragraph 32 (e). On the other hand, loans to banks with residual maturities ofless than six months are assigned a 0% RSF factor in accordance with Paragraph 29(c).
1There are multiple monetary control measures, including: (i) reserve rate adjustments in central bank reserve
requirements; (ii) operations through secured loans backed by government bonds, etc. (repos) and resale/repurchaseagreements; and (iii ) operations through selling/buying securities (government bonds, central bank bills, etc.).
Furthermore, specific measures differ across jurisdictions.
2For example, this may include deposits denominated in currencies other than the local currency of the central bank (i.e.
foreign-currency denominated central bank reserve).

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Since the holding of money market instruments issued by banks can be deemed equivalent
to loans to banks in terms of economic substance, they should also be assigned a 0% RSFfactor.
 Rationales for the proposed RSF factors for liquid assets, especially those with residual
maturities of less than one year, should be provided (Paragraph 30).
In light of avoiding overlapping management of liquid assets, it is considered reasonable toa certain extent to maintain consistency in the classification of liquid assets with that of theLCR. However, the underlying idea in assigning the similar factors is uncertain; LCR
haircuts are based on simulation of cash inflow/outflow under 1-month stressed conditions
driven by multiple factors, but the NSFR is intended to ensure the stability over a longer
time horizon (1 year).
Furthermore, while Level 1 assets are recognised as highly liquid in the LCR (that is, Level
1 assets are not subject to a haircut for inclusion in the high quality liquid assets (HQLA)),they are all assigned a 5% RSF factor in the NSFR. It is not clear why the NSFR framework
requires required stable funding for HQLA which are necessary to be held under the LCR
framework. (A 5% RSF factor may be quite high for Level 1 assets with residual maturitiesof less than one year, if such 5% rate is for default rate.)
With regard to the holding of liquid assets, there is already a concern among banks thatdifferent incentives may arise between the LCR and the leverage ratio frameworks, both ofwhich are the indicators to be introduced as part of the Basel III regime. Creating a different
incentive in addition within the liquidity framework may impose unnecessary difficulties onbank’s liquidity management.
 A 0% RSF factor should be applied to deferred and accrued accounts (e.g. accounts
receivables arising from trade date accounting of securities, etc. and accrued interest
on loans), especially to those assets that will be settled within one year (Paragraph32(e), 35(c)).
Out of the assets categorized under “other assets” by Paragraph 32(e) or 35(c), those assetsthat arise from financial transactions for accounting purposes, and are to be derecognised ina short period of time should be assigned a 0% RSF factor, because funding is virtually
unnecessary for such assets.
The assets that arise from financial transactions and are recognised for accounting purposes
include accounts receivable from the sale of bonds, including government bonds, andaccrued interest on loans. According to the Consultative Document, either a 50% or 100%
RSF factor is applied to such assets. However, the proposed factors are not appropriate
because additional funding needs for such deferred and accrued accounts would not beassumed in any case.
3Additionally, it is not equitable to apply only an RSF factor to payables/receivables
recognised simultaneously in a cross-trade of bonds, and to recognise accounting items(liability or asset) differently depending on the payment methods for interest on loans(payment in advance or in arrear).
Such assets recognised for accounting purposes not only include assets being recorded for ashort-term (e.g. receivables/payables related to the sales and purchase of bonds), but also
include accrued interest on loans where interest payments are made periodically, forinstance, on an annual basis (every 12 months). Therefore, a 0% RSF factor should beapplied at least to those assets whose scheduled settlement arrives within one year.
 The definition of the term “small- and medium-sized entities (SMEs)” should beconsistent with the definition used in the LCR framework (Paragraph 19, note 6).
The Consultative Document stipulates in Footnote 6 of Paragraph 19 that the small- andmedium-sized entities (SMEs) are defined in Paragraph 273 of the Basel II framework. Onthe other hand, the final text of the LCR framework uses the term “Small businesscustomers” and defines it in line with Paragraph 231 of the Basel II framework (BCBS128).
The Consultative Document should maintain consistency with the LCR framework in thisrespect.
Further, Table 2 (Summary of asset categories and associated RSF factors) in Paragraph 36
uses the different term “small business customers” to express the same business as the above
SMEs.
Since it is considered that there is no necessity in changing the category of business fromthat in the LCR framework, the expressions, definitions and references in line with
Paragraph 90 of the LCR framework text (BCBS238) should be aligned.
 The definition of the term “banks subject to prudential supervision” should beclarified, and should include securities and insurance companies (Paragraph 29(c),Paragraph 32(c)).
If the definition of the term “banks subject to prudential supervision” only includes banks,
as in the LCR, it may lead to unintended consequences in liquidity market. For example, inthe repo market where those other than “banks subject to prudential supervision” consists ofa majority of participants, transactions may excessively be concentrated on the banks.
Securities companies and insurance companies are the main participants of the repo market,
and are subject to industry-specific regulations and supervision in each jurisdiction. Given
this perspective, it is reasonable to consider including securities and insurance companies inthe definition of “subject to prudential supervision.”4 An RSF factor applied to reverse repos settled through CCPs should be reconsidered(Paragraph 29(c)).
Based on the idea that transactions settled through CCP is safer than over-the-countertransactions with banks subject to prudential supervision, and taking into consideration theinternational movement toward centralised clearing, the application of an RSF factor totransactions settled through CCPs should be set of 0% in line with that of loans to banks
subject to prudential supervision with a residual maturity of less than six months. The BCBS
is requested to clarify that transactions settled through CCPs are included in the scope ofParagraph 29 (c).

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