View source for Net stable funding ratio

{{Short description|Liquidity requirement in the Basel Framework}}
{{Main|Basel III}}
{{Basel Framework}}
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 requirement]]s, 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).<ref>{{cite web |url= http://www.pwc.com/en_US/us/financial-services/regulatory-services/publications/assets/net-stable-funding-ratio-basel-iii.pdf |title= First take: Basel's final NSFR |website=www.pwc.com |publisher= PwC Financial Services Regulatory Practice, November 2014}}</ref> Both ratios are landmark requirements: it is planned that they will apply to all banks worldwide if they are engaged in international banking.

==Background==
The net stable funding ratio has been proposed within [[Basel III]], the new set of capital and liquidity requirements for banks, which are over time replacing [[Basel II]].<ref>Basel III :[http://www.bis.org/bcbs/basel3.htm "Basel III" December 2010]
</ref> Basel III has been prepared within the [[Basel Committee on Banking Supervision]] of the [[Bank for International Settlements]].<ref>Bank for International Settlements: http://www.bis.org/</ref> 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.

== Description ==
The Net Stable Funding Ratio seeks to calculate the proportion of Available Stable Funding ("ASF"), via equity and certain liabilities, over Required Stable Funding ("RSF") via the assets.

* Sources of Available Stable Funding includes: customer deposits, ''long-term'' wholesale funding (from the [[interbank lending market]]), and [[Equity (finance)|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.<ref>{{cite web|url=http://www.bis.org/publ/bcbs165.pdf|title=Basel III: the net stable funding ratio|website=bis.org|access-date=8 April 2019}}</ref>

Some of the weights for longer term or "structural term [[asset]]s" are as follows:<ref>{{cite web|url=https://www.bis.org/bcbs/publ/d295.pdf|title=International framework for liquidity risk measurement, standards and monitoring|page=6|website=bis.org|access-date=12 March 2023}}</ref>
* 100% of loans longer than one year;
* 95% of demand deposits, and retail or small business deposits with maturities of less than one year;
* 90% of less stable demand and term deposits by retail and small businesses;
* 50% of loans to corporate clients and governments with a remaining life shorter than one year;
* 0% of all other liabilities and equities.

==Formula==

<math>\text{NSFR}=\frac{\mbox{Available amount of stable funding}}{\mbox{Required amount of stable funding }} >  100\% </math>

==Implementation==
As the Basel Committee on Banking Supervision (BCBS) does not have the power to issue legally binding regulation,<ref>{{cite journal|url=https://www.bis.org/bcbs/review_process.htm|title=Policy development and implementation review|date=30 October 2015|website=www.bis.org|access-date=8 April 2019}}</ref> the Basel III standards have to be implemented by national authorities. Consequently, there are differences among countries with respect to both content and timing.

The NSFR became a minimum standard on 1 January 2018. However, implementation has been delayed in many countries. Less than half of the G20 members have implemented the rules as of 2018. Among those that lag behind are the US, the EU, Switzerland and Japan. The compliant countries include Australia, Brazil, China, Indonesia and Russia. <ref>{{cite web|url=http://www.fsb.org/wp-content/uploads/P281118-1.pdf|title="FSB: Implementation and Effects of the G20 Financial Regulatory Reforms (28 November 2018 4th Annual Report" November 2018|website=fsb.org|access-date=8 April 2019}}</ref>

Over time NSFR calibration will be reviewed as proposals are developed and industry standards implemented.<ref>{{cite journal|url=https://www.bis.org/publ/bcbs188.htm|title=Basel III: International framework for liquidity risk measurement, standards and monitoring|date=16 December 2010|access-date=8 April 2019|via=www.bis.org}}</ref>

==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 [[Structured investment vehicle|conduits]] often benefit from liquidity facilities (so-called back-stop facilities) granted by the bank which created them.

==References==
{{reflist}}
<!--- After listing your sources please cite them using inline citations and place them after the information they cite. Please see http://en.wikipedia.org/wiki/Wikipedia:REFB for instructions on how to add citations. --->
*[http://www.fsa.gov.uk/pubs/international/lag_17mar10.pdf "FSA and the Net Stable Funding Ratio" 17 March 2010]

[[Category:Banking]]
[[Category:Bank regulation]]
[[Category:Stress tests (financial)]]