Net Stable Funding Ratio

Sanjay Basu, NIBM,

October 2019.
 Outline
• Features.
• Implications.
 Net Stable Funding Ratio
• The NSFR is designed to ensure that long term assets
are funded with at least a minimum amount of stable
liabilities in relation to their liquidity risk profiles.
• The NSFR aims to limit over-reliance on short-term
wholesale funding during times of buoyant market
liquidity and encourage better assessment of liquidity
risk across all on- and off-balance sheet items.
• This approach offsets incentives for banks to fund
their stock of liquid assets with short-term funds that
mature just outside the 30-day horizon for LCR.
 Available Stable Funding
• Available stable funding is defined as the total amount
of a bank’s (a) capital (Tier 1 and Tier 2 after
deductions); (b) preference share capital (not included
in Tier 1 and Tier 2) with remaining maturity of one
year or greater; (c) liabilities with effective maturities
of one year or greater; (d) the portion of demand
deposits / term deposits and wholesale funding with
maturities less than one year which is expected to stay
with the bank for an extended period in a bank-specific
stress event.
• Banks should, based on behavioural analysis and
other factors, arrive at such portion of deposits which
are likely to remain with them for at least one year.
 Required Stable Funding
• The required amount of stable funding is calculated
as the sum of the value of the assets held and funded
by the institution, multiplied by a specific required
stable funding (RSF) factor assigned to each
particular asset type, added to the amount of Off-
balance Sheet (OBS) activity (or potential liquidity
exposure) multiplied by its associated RSF factor.
• This is the denominator of the NSFR.
 Implications
• NSFR might not reduce Asset-liability mismatch.
 20-yr infrastructure projects can be funded with 3-year
deposits, without violating NSFR.
 The purpose of NSFR is to prevent concentration of liabilities
below 1 year.
• NSFR is harsh on some categories of loans.
 It assumes that 50% of almost all loans maturing within one
year, will be rolled over beyond one year.
 The underlying funds should be long-term (beyond one year).
 Implications
• The costs of holding L2A and L2B assets will rise.
 High quality corporate bonds are assumed to need 15%
funding beyond 1 year.
 Required yields will rise and make them more illiquid.
 Equities and lower-grade corporate bonds attract 50% RSF.
 Loading long-term funding costs will reduce their liquidity.
• May hurt liquidity in derivative markets.
 Collateral posted as margins attract 85% RSF.
 Clearing firms (e.g. CCIL) may charge higher fees.
 Implications
• Higher capital adequacy will improve NSFR.
• The role of bonds and long-term deposits, as stable
sources of funding, become important.
 Cost of medium/long-term funds is likely to rise.
 NSFR may make the yield curve on deposits upward sloping ,
in India.
 If medium/long-term loans become very costly, the supply of
such loans might fall.
 Improvement in LCR, through migration to stable retail
deposits, will help NSFR.
• Banks should conduct behavioural analysis of NMDs.