Net Stable Funding Ratio (NSFR)

The Net Stable Funding Ratio (NSFR) is a liquidity requirement introduced under Basel III regulations for banks. The NSFR mandates that banks maintain a minimum amount of stable funding relative to their liquidity needs over a one-year time horizon. This is designed to promote resilience against funding disruptions and ensure banks have sufficient stable funding to meet their obligations even during periods of market stress.

Here's the formula for the NSFR:

NSFR = Available Stable Funding / Required Stable Funding

  • Available stable funding (numerator): This reflects the amount of stable funding a bank has available, taking into account the composition and maturity of its funding sources. Stable funding sources typically include:

    • Customer deposits with low withdrawal risk.
    • Long-term debt.
    • Equity capital.
  • Required stable funding (denominator): This represents the bank's liquidity needs over a one-year horizon, based on the composition and maturity of its assets. Assets with higher liquidity risk and longer maturities require more stable funding. Factors considered in calculating required stable funding include:

    • Liquidity characteristics of the bank's assets.
    • Maturity profile of the assets.
    • Potential for off-balance sheet exposures.

The target minimum NSFR set by Basel III standards is greater than 100%. This means that banks must have at least as much stable funding available as they require to cover their liquidity needs over a year.

The NSFR complements the Liquidity Coverage Ratio (LCR), another Basel III liquidity requirement. While the LCR focuses on short-term liquidity needs (30 days), the NSFR addresses longer-term funding stability over a one-year horizon. Together, the LCR and NSFR contribute to a comprehensive framework for managing bank liquidity risk.