Net Stable Funding Ratio
Encyclopedia
During the 2007 banking crisis, banks such as Northern Rock
in the UK, and US investment banks such as Bear Stearns
and Lehman Brothers
suffered a bank run
and/or collapsed, due to their over-reliance on short term wholesale funding from the Interbank lending market
and lack of capital.
As a result the G20 has launched an overhaul of banking regulation. This led to the Dodd–Frank Wall Street Reform and Consumer Protection Act in the US, to new EU directives, and to Capital and Liquidity Requirements.
Most of the media attention focused on the Capital Requirements proposed within Basel III
. But Basel III
also contains entirely new liquidity requirements: the Net Stable Funding ratio (NSFR or NSF ratio) and the Liquidity Coverage Ratio (LCR).
Both ratios are landmark requirements: it is planned that they will apply to all banks worldwide if they are engaged in international banking activities.
, the new set of capital requirements for banks, which will over time replace Basel II
. Basel III has been prepared within the Basel Committee on Banking Supervision
of the Bank for International Settlements
.
Basel III is not yet implemented.
This funding ratio seeks to calculate the proportion of long term assets which are funded by long term, stable funding.
These components of Stable Funding are not equally weighted: see page 21 and 22 of the Consultative Document dated December 2009 for the detailed weights.
Long term assets or "Structural Term Asset
s" means:
See page 23 of the Consultative Document dated December 2009 for the detailed weights.
This Consultative Document will be amended.
See page 20 of the Consultative Document dated December 2009
are part of the new proposed DEVELOPMENT OF INTERNATIONAL LIQUIDITY STANDARDS.
Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard. Over time this Net stable funding ratio will be reviewed as proposals are developed and industry standards implemented.
and liquidity facilities to clients). As a consequence, once the standard is in place, off-balance sheet commitments will need to be funded, within the Stable Funding.
See page 24 of the Consultative Document dated December 2009 for the detailed weights.
This may help prevent the excessive use of the Shadow banking system
, including Special purpose entity
and Structured investment vehicle
, as these conduits
often benefit from liquidity facilities (so-called back-stop facilities) granted by the bank which created them.
Northern Rock
Northern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for...
in the UK, and US investment banks such as Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
and Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
suffered a bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
and/or collapsed, due to their over-reliance on short term wholesale funding from the Interbank lending market
Interbank lending market
The interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate...
and lack of capital.
As a result the G20 has launched an overhaul of banking regulation. This led to the Dodd–Frank Wall Street Reform and Consumer Protection Act in the US, to new EU directives, and to Capital and Liquidity Requirements.
Most of the media attention focused on the Capital Requirements proposed within Basel III
Basel III
BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial...
. But Basel III
Basel III
BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial...
also contains entirely new liquidity requirements: the Net Stable Funding ratio (NSFR or NSF ratio) and the Liquidity Coverage Ratio (LCR).
Both ratios are landmark requirements: it is planned that they will apply to all banks worldwide if they are engaged in international banking activities.
Net Stable Funding ratio (NSFR or NSF ratio)
The Net Stable Funding Ratio has been proposed within Basel IIIBasel III
BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial...
, the new set of capital requirements for banks, which will over time replace Basel II
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
. Basel III has been prepared within the Basel Committee on Banking Supervision
Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1975. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance...
of the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
.
Basel III is not yet implemented.
This funding ratio seeks to calculate the proportion of long term assets which are funded by long term, stable funding.
- Stable Funding includes: customer deposits, long-term wholesale funding (from the Interbank lending marketInterbank lending marketThe interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate...
), and EquityEquity (finance)In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
. - "Stable Funding" excludes short-term wholesale funding (also from the Interbank lending marketInterbank lending marketThe interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate...
).
These components of Stable Funding are not equally weighted: see page 21 and 22 of the Consultative Document dated December 2009 for the detailed weights.
Long term assets or "Structural Term Asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s" means:
- 100% of loans longer than one year;
- 85% of loans to retail clients with a remaining life shorter than one year;
- 50% of loans to corporate clients with a remaining life shorter than one year;
- and 20% of Government and corporate bonds.
- Off-balance Sheet Categories are also weighted.
See page 23 of the Consultative Document dated December 2009 for the detailed weights.
This Consultative Document will be amended.
The Standard (or Metric)
Stable Funding/weighted Long Term Assets must be > 100%See page 20 of the Consultative Document dated December 2009
Planned implementation
Together with the Liquidity Coverage Ratio (LCR), the Net Stable Funding ratios (NSF ratios)are part of the new proposed DEVELOPMENT OF INTERNATIONAL LIQUIDITY STANDARDS.
Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard. Over time this Net stable funding ratio will be reviewed as proposals are developed and industry standards implemented.
Off-balance Sheet Categories
As mentioned above, Off-balance Sheet Categories are also weighted: they will contribute to the Long Term Assets. This is best explained by the potential for contingent calls on funding liquidity (revocable and irrevocable line of creditLine of credit
A line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of...
and liquidity facilities to clients). As a consequence, once the standard is in place, off-balance sheet commitments will need to be funded, within the Stable Funding.
See page 24 of the Consultative Document dated December 2009 for the detailed weights.
This may help prevent the excessive use of the Shadow banking system
Shadow banking system
The shadow banking system is the infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds, money market funds and Structured investment vehicles...
, including Special purpose entity
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
and Structured investment vehicle
Structured investment vehicle
A structured investment vehicle was an operating finance company established to earn a spread between its assets and liabilities like a traditional bank...
, as these conduits
Structured investment vehicle
A structured investment vehicle was an operating finance company established to earn a spread between its assets and liabilities like a traditional bank...
often benefit from liquidity facilities (so-called back-stop facilities) granted by the bank which created them.