How is the Net Stable Funding Ratio computed and why is the horizon one year?

Question

AcadiFi · Accepted Answer

NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF) ≥ 100%. It forces banks to fund longer-term and illiquid assets with stable liabilities, addressing structural maturity mismatch beyond the 30-day LCR horizon. ASF factors (applied to liabilities): - Tier 1/Tier 2 capital, liabilities >1yr: 100% - Stable retail deposits <1yr: 95% - Less stable retail deposits <1yr: 90% - Operational deposits, non-financial corp <1yr: 50% - Financial-institution funding <6 months: 0% RSF factors (applied to assets): - Cash and short-term HQLA: 0-5% - Sovereign Level 1 >1yr: 5% - Level 2A corporate bonds: 15% - Unencumbered loans to retail/SME <1yr: 50% - Residential mortgages <35% risk weight: 65% - Non-HQLA equities, other loans >1yr: 85% - Non-performing assets, long-dated illiquid: 100% Example: Meridith Alpine Bank total ASF: retail deposits $8,000M × 90% = $7,200M + term debt >1yr $3,000M × 100% = $3,000M → ASF $10,200M. RSF: Level 1 HQLA $2,000M × 5% = $100M + mortgages $6,500M × 65% = $4,225M + corporate loans >1yr $3,500M × 85% = $2,975M → RSF $7,300M. NSFR = $10,200 / $7,300 = 140% ✓ NSFR tends to bind for banks with large illiquid loan books (community banks, mortgage lenders), while LCR binds for banks with concentrated wholesale funding. The one-year horizon aligns with typical business cycles of funding-market stress and prevents reliance on short-term wholesale funding rollovers. FRM candidates should remember the interaction: LCR forces liquidity buffers for 30-day shocks, NSFR forces structural stability over the year.

How is the Net Stable Funding Ratio computed and why is the horizon one year?

Master Part II with our FRM Course

Related Questions

Practice Questions