Net Stable Funding Ratio

Net Stable Funding Ratio (NSFR)

The Net Stable Funding Ratio (NSFR) is a regulatory liquidity ratio that measures a bank’s ability to meet its long-term liquidity obligations. The NSFR is calculated by dividing the bank’s stable funding by its required stable funding.

The NSFR was introduced by the Basel Committee on Banking Supervision in 2014 in response to the financial crisis of 2007-2008. The NSFR is designed to ensure that banks have enough stable funding to meet their long-term obligations even if there is a disruption to the financial markets.

The NSFR is calculated as follows:

NSFR = Stable funding / Required stable funding
  • Stable funding: Stable funding is funding that is expected to be available to a bank over a one-year period even in a stressed market. Examples of stable funding include deposits, equity, and long-term debt.
  • Required stable funding: Required stable funding is the amount of stable funding that a bank is required to hold based on its assets and liabilities. The required stable funding is calculated using a formula that is set by the Basel Committee.

The NSFR must be at least 100%. This means that banks must have enough stable funding to meet their required stable funding for at least one year.

MCQs on Net Stable Funding Ratio

  1. Which of the following is NOT a stable funding source?
    • Deposits
    • Equity
    • Long-term debt
    • Commercial paper
    • The correct answer is commercial paper. Commercial paper is not a stable funding source because it is a short-term debt instrument.
  2. Which of the following is the most important factor in determining a bank’s NSFR?
    • The amount of stable funding the bank holds
    • The amount of required stable funding the bank has
    • The length of the time horizon (one year)
    • All of the above
    • The correct answer is all of the above. The NSFR is determined by the amount of stable funding the bank holds, the amount of required stable funding the bank has, and the length of the time horizon (one year). All of these factors are important in determining a bank’s NSFR.
  3. Which of the following is the most challenging aspect of complying with the NSFR?
    • Calculating the required stable funding
    • Holding enough stable funding
    • Monitoring the NSFR on a daily basis
    • All of the above
    • The correct answer is all of the above. Calculating the required stable funding can be challenging, especially for banks with a lot of complex assets and liabilities. Holding enough stable funding can also be challenging, especially for smaller banks. Monitoring the NSFR on a daily basis can also be challenging, especially for banks with a lot of activity.

Conclusion

The Net Stable Funding Ratio (NSFR) is an important regulatory liquidity ratio that measures a bank’s ability to meet its long-term liquidity obligations. The NSFR is designed to ensure that banks have enough stable funding to meet their long-term obligations even if there is a disruption to the financial markets.