Samiksha Jaiswal (Editor)

Net stable funding ratio

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During the financial crisis of 2007–2008, several banks, including the UK's Northern Rock and the U.S. investment banks Bear Stearns and Lehman Brothers, suffered a liquidity crisis, due to their over-reliance on short-term wholesale funding from the interbank lending market. As a result, the G20 launched an overhaul of banking regulation known as Basel III. In addition to changes in capital requirements, Basel III also contains two entirely new liquidity requirements: the net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR). On October 31, 2014, the Basel Committee on Banking Supervision issued its final Net Stable Funding Ratio (it was initially proposed in 2010 and re-proposed in January 2014).

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Both ratios are landmark requirements: it is planned that they will apply to all banks worldwide if they are engaged in international banking.

Net stable funding ratio (NSFR or NSF ratio)

The net stable funding ratio has been proposed within Basel III, the new set of capital requirements for banks, which will over time replace Basel II. Basel III has been prepared within the Basel Committee on Banking Supervision of the Bank for International Settlements. Basel III has not been implemented yet. This funding ratio seeks to calculate the proportion of long-term assets which are funded by long-term, stable funding.

  • Stable funding includes: customer deposits, long-term wholesale funding (from the interbank lending market), and equity.
  • "Stable funding" excludes short-term wholesale funding (also from the interbank lending market).
  • These components of stable funding are not equally weighted: see page 21 and 22 of the Consultative Document dated December 2009 for the detailed weights.

    Long-term or "structural term assets" means:

  • 100% of loans longer than one year;
  • 85% of loans to retail clients with a remaining life shorter than one year;
  • 50% of loans to corporate clients with a remaining life shorter than one year;
  • 20% of government and corporate bonds.
  • Off-balance sheet categories
  • The consultative document will be amended.

    NSFR

    NSFR = Available amount of stable funding Required amount of stable funding  > 100 %

    Planned implementation

    Together with the liquidity coverage ratio (LCR), the net stable funding ratios (NSF ratios) are part of the new proposed development of international liquidity standards.

    The LCR will be gradually implemented, starting in 2015, when the ratio should be 60% or higher. The implementation must be finished in 2019, with a ratio higher than 100%.

    Banks have until 2018 to meet the NSFR standard. Over time this NSF ratio will be reviewed as proposals are developed and industry standards implemented.

    Off-balance sheet categories

    As mentioned above, off-balance sheet categories are also weighted: they will contribute to the long-term assets. This is best explained by the potential for contingent calls on funding liquidity (revocable and irrevocable line of credit and liquidity facilities to clients). Therefore, once the standard is in place, off-balance sheet commitments will need to be funded, within the stable funding.

    This may help prevent the excessive use of the shadow banking system, including special purpose entity and structured investment vehicle, as these conduits often benefit from liquidity facilities (so-called back-stop facilities) granted by the bank which created them.

    References

    Net stable funding ratio Wikipedia