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Net Stable Funding Ratio

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Net Stable Funding Ratio

Net Stable Funding Requirement (NSFR)

The NSFR requires banks to maintain stable levels of funding relative to their assets and off-balance sheet liabilities. It is a structural ratio designed to improve both bank and systemic resilience. It is a check on rapid bank balance sheet growth and it discourages banks from holding long term illiquid assets funded through wholesale sources.


It is one of two minimum standards (the other being the Liquidity Coverage Ratio which focusses on holding short term high quality assets to meet short term liquidity shocks). To back this up there are a host of liquidity monitoring tools they impose on banks via regulatory reporting.


The NSFR is designed to be a minimum standard by 1/1/2018.


For a detailed explanation of these weighting please refer to: Basel Committee on Banking Supervision Basel III: the net stable funding ratio, October 2014.


Calculation

NSFR = Available amount of stable funding (ASF) / Required amount of stable funding (RSF) > 100%


The ASF are the capital and liabilities that are reliable and exceed one year in maturity.


The RSF results from the liquidity characteristics and residual maturities of assets and off-balance sheet items.


The emphasis is on longer term funding sources being used to fund assets held on the balance sheet. At the same time calibration is used to improve the real-world sensitivity of the ratio. The calibration is designed to consider the following.


  • The NSFR should not stop bank lending;

  • Banks do roll over many loans;

  • Some assets do mature and roll off;

  • High quality assets don’t need to be wholly funded by long term money because they can be sold or used as collateral.


Factors or weightings apply to the assets and liabilities to scale them for real world behaviour. The calibration is complex and beyond the scope of this document however the following provides context.


ASF weightings

  • Regulatory capital, additional capital instruments and borrowings over one year in maturity receive a 100% weighting. This is solid, reliable funding;

  • Demand and term deposits from retail sources receive a 90% weighting. This is reliable funding;

  • Funding from non-financial sources, operational deposits and sovereign deposits less than one year in maturity receive a 50% weighting. This funding may be withdrawn;

  • Other funding shorter than six months receives a 0% weighting. It cannot be relied on.


RSF Weightings

  • These try to measure the amount of funding that will be required to fund assets that are not liquid or cannot be used as collateral to secure funding;

  • Central bank reserves and receivables from trades receive a 0% weighting;

  • Marketable claims on central banks and sovereigns receive a 5% weighting;

  • Unencumbered loans to financial institutions shorter than 6 months receive a 10% weighting;

  • Corporate debt that is at least AA rated receives a 15% weighting;

  • RMBS (at least AA rated) and corporate debt A+ to BBB- receive a 50% weighting;

  • Loan to financial institutions over one year receive a 100% weighting.


First Published by Barbican Consulting Limited 2017

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