The Basel III "Net Stable Funding Ratio" (NSFR) complements the Basel III Liquidity Coverage Ratio (LCR) by providing a longer-term (i.e. one-year, compared to 30-days) measure of stable funding, requiring that banks hold at least a 100% ratio of "available stable funding" (ASF) compared to the amount of "required stable funding" (RSF) (contrast this with the LCR's requirement that banks hold sufficient High Quality Liquid Assets (HQLA) equal to their potential losses, to allow them to survive a 30-day stress scenario) on an ongoing basis (see our Feature Piece in Edition 12 of this SCM Briefing for a detailed summary of the LCR Delegated Regulation which sets out the key HQLA provisions, including the eligibility criteria for ABS as "Level 2B assets" within the LCR). The NSFR is intended to reduce funding risk, limit overreliance on short-term wholesale funding, encourage better assessments of funding risks, and promote funding stability. It is the final key component of the Basel III capital and liquidity framework to be finalised, save for the add-on amendments to the securitisation framework, which are not yet in final form, although a further communication on this is expected by year-end 2014. An earlier Consultation Document published in January 2014 (which was summarised in Edition 8 of this SCM Briefing) set out the Basel Committee's initial thinking on the NSFR, and, based on feedback received, the Basel Committee released the final NSFR framework and the timeline for its implementation, in a document entitled Basel III: The Net Stable Funding Ratio, in October 2014. According to the final framework, the amount of ASF is calculated by assigning the "carrying value" of a banks' capital and liabilities to one of five categories (determined by reference to the application of a percentage 'ASF factor' - i.e. each set of liabilities receive an ASF factor of either 100% (e.g. regulatory capital), 95% (e.g. stable demand deposits), 90% (e.g. less stable demand deposits), 50% (e.g. operational deposits) or 0% (e.g. liabilities with no stated maturity), based on their perceived stability), and the total ASF is the sum of the weighted amounts. The RSF amount is similarly calculated, by assigning the carrying value of a banks' assets to 7 categories determined by reference to the application of a percentage 'RSF factor' which is then added to the amount of off-balance sheet activity. The 7 RSF factors incorporate some of the key definitions from the LCR, and range from 0% (e.g. coins and banknotes), 5% (unencumbered Level 1 LCR assets), 15% (unencumbered Level 2A LCR assets), 50% (e.g. LCR Level 2B assets, including RMBS, corporate debt securities and exchange-traded common equity shares, subject to the LCR's conditions), 65% (e.g. residential mortgages with a maturity of over 1 year and that qualify for a 35% risk weight under the Basel Standardised Approach), 85% (e.g. unencumbered performing loans that do not qualify for a 35% risk weight under the Standardised Approach), to 100% (e.g. all assets that are encumbered for over one year). The higher the ASF factor applied to a liability obviously means that a greater proportion of the value of the liability is included in the ASF amount, and correspondingly, the higher the RSF factor, the greater the proportion of the asset value is included in the RSF amount. Off-balance sheet items are assigned an RSF factor of 5% of the currently undrawn portion. As mentioned, the calculation is that ASF divided by RSF = 100% minimum. The NSFR will become a minimum standard as part of the Basel II framework by 1 January 2018. Its application (as with the other aspects of the Basel III framework) is to all internationally active banks on a consolidated basis, but supervisors may apply it to other banks and any subset of entities of internationally active banks to ensure consistency. Banks are required to meet the NSFR requirement on an ongoing basis, and should report at least quarterly to supervisors. We now expect to see national regulators drawing up rules to implement the NSFR locally, and further Level 2 measures (in the form of a Regulatory Technical Standard) are likely to be drawn up under the Capital Requirements Directive IV (CRD IV) to implement the framework within Europe.
Basel Committee on Banking Supervision: The Net Stable Funding Ratio