Basel III: the net stable funding ratio
The NSFR is a significant component of the Basel III reforms. It requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thus reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure and potentially lead to broader systemic stress. The NSFR will become a minimum standard by 1 January 2018.
Proposals on the NSFR were first published in 2009, and the measure was included in the December 2010 Basel III agreement. At that time, the Committee put in place a rigorous process to review the standard and its implications for financial market functioning and the economy. In January 2014 the Committee issued a revised standard that was recalibrated to focus on the riskier types of funding profile employed by banks while improving alignment with the Liquidity Coverage Ratio (LCR) and reducing cliff effects in the measurement of available and required stable funding.
The final NSFR retains the structure of the January 2014 consultative proposal. The key changes introduced in the final standard published today cover the required stable funding for:
- short-term exposures to banks and other financial institutions;
- derivatives exposures; and
- assets posted as initial margin for derivative contracts.
In addition, the final standard recognises that, under strict conditions, certain asset and liability items are interdependent and can therefore be viewed as neutral in terms of the NSFR.
The Basel Committee wishes to thank all those who contributed time and effort to express their views during the consultation process.