Net Stable Funding Ratio (NSFR)

The Net Stable Funding Ratio (NSFR) is a regulatory metric designed to promote long-term funding stability within the banking sector. It is a key component of the Basel III reforms, introduced in response to the 2008 financial crisis, aiming to reduce the reliance of banks on short-term funding sources and encourage them to rely more on stable, longer-term funding. The NSFR essentially compels banks to maintain a sufficient level of stable funding to cover their illiquid assets over a one-year horizon.

The NSFR is calculated as the ratio of available stable funding (ASF) to required stable funding (RSF):

NSFR = Available Stable Funding / Required Stable Funding

A bank must maintain an NSFR of at least 100% to comply with regulatory requirements. This signifies that the bank has enough stable funding to cover its funding needs during a period of stress, promoting solvency and reducing systemic risk.

Understanding Available Stable Funding (ASF)

Available Stable Funding represents the portion of a bank's liabilities and capital expected to remain stable for at least one year. Different categories of liabilities and capital are assigned different weighting factors, reflecting their stability. For example:

• Capital and Perpetual Instruments: Receive a 100% weighting, as they represent the most stable source of funding.
• Long-Term Debt (over one year maturity): Receive a weighting ranging from 50% to 100% depending on their remaining maturity and type of issuer.
• Stable Deposits: Retail deposits that are deemed "sticky" and less likely to be withdrawn receive a higher weighting compared to less stable deposits.
• Operational Deposits: Deposits that are essential for a bank's daily operations also receive a higher weighting.

Lower weightings are assigned to shorter-term funding sources, such as deposits with maturities of less than one year, reflecting their lower stability.

Understanding Required Stable Funding (RSF)

Required Stable Funding represents the amount of stable funding a bank needs to support its assets, based on their liquidity characteristics. Different categories of assets are assigned different weighting factors, reflecting how quickly they can be converted into cash. For example:

• Loans with maturities greater than one year: Receive a higher weighting, as they are less liquid and require stable funding.
• Illiquid Securities: Such as corporate bonds and equities, also receive higher weightings.
• Liquid Assets: High-quality liquid assets (HQLA) like government bonds receive lower weightings, reflecting their ease of conversion to cash.
• Off-Balance Sheet Exposures: Such as undrawn credit commitments, also contribute to the RSF, reflecting the potential need for funding if these commitments are drawn upon.

The higher the weighting of an asset, the greater the amount of stable funding required to support it.

Importance of the NSFR

The NSFR plays a vital role in promoting financial stability by:

• Reducing Reliance on Short-Term Funding: Encouraging banks to fund themselves with longer-term, more stable sources.
• Improving Liquidity Risk Management: Ensuring banks have sufficient funding to withstand periods of stress.
• Limiting Excessive Maturity Transformation: Preventing banks from excessively funding long-term assets with short-term liabilities.
• Strengthening the Banking System: Contributing to a more resilient and stable banking system, reducing the risk of systemic crises.

By promoting stable funding practices, the NSFR helps ensure that banks are better equipped to weather economic shocks and continue providing essential financial services to the economy.