On October 31st, the Basel Committee on Banking Supervision (BCBS) issued its final Net Stable Funding Ratio (NSFR), which was originally introduced by BCBS in 2010 and re-proposed in January 2014. The NSFR compares the amount of a firm’s available stable funding (ASF, the ratio’s numerator) to its required stable funding (RSF, the ratio’s denominator) to measure how the firm’s asset base is funded. The NSFR is seen by BCBS as a complement to its previously finalized Liquidity Coverage Ratio (LCR)–recently implemented in the US as a final rule–which is intended to promote short term resilience of a firm’s liquidity risk profile.
Overall, the final NSFR remains a fairly crude regulatory tool subject to measurement deficiencies (e.g., potentially imposing different liquidity requirements on practically identical repo transactions) and unintended consequences (e.g., higher transaction costs and instability in deposit markets due to increased demand for deposits that are deemed more stable under the final standard). Despite these weaknesses, and despite changes introduced in the final NSFR that make the standard somewhat more stringent, we expect compliance with the final standard to be manageable for most larger firms.
This First take elaborates on the key points above and discusses what's next.