What is Net Stable Funding Ratio?
The net stable funding ratio is a liquidity requirement that requires banks to have sufficient stable funding to cover the length of their long-term assets. Long-term is often defined as more than one year for both money and assets, with lesser needs for anything between six months and a year to avoid a cliff-edge impact. To meet the criteria, banks must maintain a ratio of 100 percent.
Example of Net Stable Funding Ratio:
The NSFR focuses on the bank’s ability to manage liquidity over a period of one year. The ratio is computed as:
the amount of available stable funding / amount of required stable funding ≥ 100%
To calculate the numerator, each source of funding (such as retail deposits, repurchase agreements, capital, and so on) is multiplied by a factor that reflects the relative stability of the funding source. The higher the factor, the more illiquid, meaning it is funding that is less likely to leave the bank (e.g., equity is considered a permanent source of funding that cannot be withdrawn in a crisis while wholesale funding is more likely to be withdrawn). Let’s suppose, if the amount of available stable funding in USD 100mn and the amount of required stable funding is also USD 100mn, then the NSFR would be 100%.
Why is NSFR important?
The NSFR limits overreliance on short-term wholesale funding encourages the better assessment of funding risk across all on- and off-balance sheet items and promotes funding stability.