Net Stable Funding Ratio finalised by the Basel Committee
31 October 2014
The Basel Committee on Banking Supervision has today issued the final standard for the Net Stable Funding Ratio ("NSFR"), as endorsed by the Committee's governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS).
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. The Committee is currently developing disclosure standards for the NSFR and expects to publish them for consultation around year end.
Stefan Ingves, Chairman of the Basel Committee and Governor, Sveriges Riksbank, said, "A key lesson from the crisis has been the need to prevent overreliance on short-term, volatile sources of funding. The NSFR does this by limiting the use of volatile short-term borrowings to fund illiquid assets. In finalising the standard, the Committee has essentially completed its regulatory reform agenda, undertaken to promote a more resilient banking sector following the financial crisis."
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.
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 Basel Committee wishes to thank all those who contributed time and effort to express their views during the consultation process.