The Net Stable Funding Ratio (NSFR)

The net stable funding ratio measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.

The standard requires a minimum amount of funding that is expected to be stable over a one year time horizon based on liquidity risk factors assigned to assets and off-balance sheet liquidity exposures.

The NSFR is intended to promote longer-term structural funding of banks' balance sheets, off-balance sheet exposures and capital markets activities.

Objective

To promote more medium and long-term funding of the assets and activities of banking organisations, the Committee has developed the Net Stable Funding Ratio.

This metric establishes a minimum acceptable amount of stable funding based on the liquidity characteristics of an institution's assets and activities over a one year horizon.

This standard is designed to act as a minimum enforcement mechanism to complement the liquidity coverage ratio standard and reinforce other supervisory efforts by incenting structural changes in the liquidity risk profiles of institutions away from short-term funding mismatches and toward more stable, longer-term funding of assets and business activities.

In particular, the NSFR standard is structured to ensure that investment banking inventories, off-balance sheet exposures, securitisation pipelines and other assets and activities are funded with at least a minimum amount of stable liabilities in relation to their liquidity risk profiles.

The NSFR aims to limit over-reliance on wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all onand off-balance sheet items.

In addition, the NSFR approach would help to counterbalance the cliff-effects of the liquidity coverage ratio and offset incentives for institutions to fund their stock of liquid assets with short-term funds that mature just outside the supervisory defined horizon for that metric.

The NSFR builds on traditional "net liquid asset" and "cash capital" methodologies used widely by internationally active banking organisations, bank analysts and rating agencies.

However, the proposed measure expands general industry conventions of these concepts to account for the potential liquidity risk of off-balance sheet (OBS) exposures and various types of maturity mismatches involved in short-term secured funding of long-dated assets that traditional forms of these measures may ignore.

The standard provides a comprehensive measure of liquidity risk exposure that acknowledges recent market difficulties, including the need to fund securities in trading inventories or securitisation pipelines in the face of illiquid markets.

In computing the amount of assets that should be backed by stable funding, the proposed methodology includes required amounts of stable funding for all illiquid assets and securities held, regardless of accounting treatment (eg trading versus available-for-sale or held-to-maturity designations) and with constrained assumptions regarding trading and securitisation inventory turnover.

In effect, portions of trading assets are required to be funded using stable funding sources based not on assumed execution turnover but on the relative liquidity characteristics of the positions held.

Additional resources funded by stable sources are also allocated to support at least a small portion of the potential calls on liquidity arising from OBS commitments and contingencies.

The NSFR is defined as a ratio of available amount of stable funding to a required amount of stable funding.

This ratio must be greater than 100%.

"Stable funding" is defined as those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress.

The amount of such funding required of a specific institution is a function of the liquidity characteristics of various types of assets held, OBS contingent exposures incurred, and/or the activities pursued by the institution.

Definition of available stable funding

Available stable funding (ASF) is defined as the total amount of an institution's:

1) capital;

2) preferred stock with maturity of equal to or greater than one year;

3) liabilities with effective maturities of one year or greater; and

4) that portion of "stable" non-maturity deposits and/or term deposits with maturities of less than one year that would be expected to stay with the institution for an extended period in an idiosyncratic stress event.

The objective of the standard is to ensure stable funding on an ongoing, viable entity basis, over one year in an extended firm-specific stress scenario where a bank encounters, and investors and customers become aware of:

A significant decline in profitability or solvency arising from heighted credit risk, market risk or operational risk and/or other risk exposures;

A potential downgrade in a debt, counterparty credit or deposit rating by any nationally recognised credit rating organisation; and/or;

A material event which calls into question the reputation or credit quality of the institution.

For the purposes of this standard, extended borrowing from central bank lending facilities outside regular open market operations are not considered in this ratio, in order not to create a reliance on the central bank as a source of funding.

Definition of required stable funding for assets and off-balance sheet exposures.

The amount of stable funding required by supervisors is to be measured using supervisory assumptions on the broad characteristics of the liquidity risk profiles of an institution's assets, off-balance sheet exposures and other selected activities.

The required amount of stable funding is calculated as the sum of the value of the assets held and funded by the institution, multiplied by a specific required stable funding (RSF) factor assigned to each particular asset type, added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor.

The RSF factor applied to the reported values of each asset or OBS exposure is the amount of that item that supervisors believe should be supported with stable funding.

Assets that are more liquid and more readily available to act as a source of extended liquidity in the stressed environment identified above receive lower RSF factors (and require less stable funding) than assets considered less liquid in such circumstances and, therefore, require more stable funding.

The RSF factors assigned to various types of assets are parameters intended to approximate the amount of a particular asset that could not be monetised through sale or use as collateral in a secured borrowing on an extended basis during a liquidity event lasting one year.

Under this standard such amounts are expected to be supported by stable funding.

Except for "repo-like" transactions as defined in existing global capital standards issued by the Committee, all encumbered assets would also be expected to be fully supported by stable funding.