Balance Sheet Management for SIFIs

Andreas Bohn and Paolo Tonucci

This article was first published as a chapter in Managing Systemic Exposure, by Risk Books.

With the introduction of Basel III, three new metrics for balance-sheet risk management will become relevant for banks: the liquidity coverage ratio, which defines a minimum for the liquidity buffer relative to potential outflows in a stress scenario, and the net stable funding ratio (NSFR), which defines a minimum for stable sources of funding to the term funding requirements on the asset side, will be the primary funding sufficiency metrics. The leverage ratio sets a minimum for capital as a percentage of total balance-sheet size. In the future, these ratios will supplement the already implemented Basel II solvency (or capital) ratio that sets a minimum level of capital relative to risk-weighted assets from credit risk, market risk and operational risk.

In this chapter, we attempt to explain the relationship between the various regulatory and market constraints that need to be considered in managing a bank’s balance sheet. Apart from the ratios, another set of ratios are applied to measure and contain risks in a bank’s balance sheet. Of these, the loan-to-deposit ratio (LDR), which