Glossary term
Net Stable Funding Ratio (NSFR)
Subject: Risk Management, Financial Risk (Credit, Market, Liquidity)
The net stable funding ratio compares a bank's available stable funding with the stable funding its assets and commitments require over a one-year horizon. Banks must keep the ratio at or above 100%.
Explanation
The ratio was introduced in Basel III to stop banks from financing long-term lending with short-term money that can vanish quickly. On one side sits available stable funding, which weights each source by how reliable it is: capital and long-term debt count in full, stable retail deposits count mostly, and short-term wholesale funding counts little. On the other side sits required stable funding, which weights each asset by how hard it would be to turn into cash within a year. Loans and illiquid holdings need a lot of stable funding, while central bank reserves and top-quality government bonds need little. It differs from the liquidity coverage ratio, which looks only at a thirty-day stress. Supervisors read a ratio below 100% as a sign that the balance sheet leans on money that could leave within months.
Example
Overnight borrowing from other banks pays for most of one bank's ten-year corporate loan book. Its stable funding falls well short of what the loans require, so the ratio sits at 82%. To reach 100% it issues five-year bonds and runs a campaign to attract longer-term customer deposits, then lets part of the overnight borrowing roll off.
Not to be confused with
- Liquidity Coverage Ratio
- The coverage ratio tests survival through a thirty-day stress using liquid assets. The stable funding ratio tests how the whole balance sheet is financed over a year.