Net stable funding ratio
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).
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 and liquidity 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. Various components of Basel III are being implemented in different jurisdictions and Basel committee reports progress on the state of implementation through its Regulatory Consistency Assessment Programme ("RCAP") which is published on a semi-annual basis.
Net Stable Funding ratio seeks to calculate the proportion of Available Stable Funding ("ASF") via the liabilities over Required Stable Funding ("RSF") for the assets.
- Sources of Available 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.
Some of the weights for longer term or "structural term assets" are as follows:
- 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.
Together with the liquidity coverage ratio (LCR), the net stable funding ratio (NSFR) are part of the newly proposed international liquidity standards.
The LCR was gradually implemented, starting in 2015, when the target ratio was 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 NSFR calibration 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 as they contribute to both the assets and liabilities. 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, with 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.
- "First take: Basel's final NSFR" (PDF). http://www.pwc.com/us/en/financial-services/regulatory-services/publications/net-stable-funding-ratio-basel-iii.jhtml. PwC Financial Services Regulatory Practice, November, 2014. External link in
- Basel III :"Basel III" December 2010
- Bank for International Settlements: http://www.bis.org/
- International framework for liquidity risk measurement, standards and monitoring http://www.bis.org/publ/bcbs165.pdf
- The Group of Governors and Heads of Supervision reach broad agreement on Basel Committee capital and liquidity reform package 26 July 2010 http://www.bis.org/press/p100726/annex.pdf
- Basel III: the liquidity coverage ratio and liquidity monitoring tools. http://www.bis.org/publ/bcbs188.pdf for the detailed implementation
- *"Basel III: International framework for liquidity risk measurement, standards and monitoring" December 2010