How does the Net Stable Funding Ratio (NSFR) work and how does it complement the LCR?

The Net Stable Funding Ratio (NSFR) is the structural liquidity complement to the LCR. While the LCR ensures short-term survival (30 days), the NSFR promotes stable long-term funding by requiring banks to fund their activities with sufficiently stable sources over a one-year horizon.

The Formula:

NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF) ≥ 100%

Available Stable Funding (ASF):

ASF measures the stability of a bank's funding sources over one year. More stable funding gets a higher ASF factor:

Required Stable Funding (RSF):

RSF measures how much stable funding each asset requires based on its liquidity characteristics. More illiquid assets require more stable funding:

Why Both LCR and NSFR Are Needed:

The LCR prevents a bank from dying in a 30-day crisis. The NSFR prevents a bank from creating the conditions for that crisis in the first place by discouraging excessive reliance on volatile short-term wholesale funding.

Example: A bank could pass the LCR by holding enough Treasuries while funding long-term mortgages entirely with overnight wholesale repo. The LCR is met (Treasuries cover 30-day outflows), but the NSFR would fail (volatile repo funding, RSF factor 65-85% on mortgages, ASF factor 0% on overnight repo). The NSFR forces the bank to fund those mortgages with stable deposits or long-term debt.

Exam Tip: Know the key ASF and RSF factors and understand the complementary roles of LCR (short-term buffer) vs NSFR (structural stability).

Master both liquidity ratios in our FRM Part II study materials.