NSFR: final leg of liquidity regulation!
by Ashish Deccannawar Liquidity risk management is critical for the stability of the global financial ecosystem. Net Stable Funding Ratio (NSFR) is an important long-term liquidity requirement to be implemented in the United states. The aim of this article is to provide a high level viewpoint on U.S. NSFR requirements, timeline, and potential implementation challenges the industry may face.
what is NSFR? NSFR stands for Net Stable Funding Ratio. NSFR is a quantitative measure that validates banks have stable long-term funding to support the long-term stress. NSFR is measured as below:
Net Stable Funding Ratio (NSFR) =
Available Stable Funding (ASF) Required Stable Funding (RSF)
> 100%
Available Stable Funding (ASF) is composed of regulatory capital and liabilities, which are then multiplied by ASF factors to calculate the available stable funding. Characteristics that drive ASF factors include: 1. Funding tenor (longer maturities have a higher factor than shorter maturities due to rollover risk) 2. Funding type (stable deposits with deposit insurance have higher factor compared to other types of funding due to funding stability) 3. Counterparty type (Non-financial counterparties will have a higher factor compared to financial counterparties; Financial counterparties are typically a less reliable source of funding as they tend to be more sensitive to market fluctuation) Required Stable Funding (RSF) factors are assigned to the bank’s assets, off balance sheet commitments, and derivative exposures. Characteristics that drive RSF factors include: 1. Tenor (long-term assets need more stable funding to support long dated inflows) 2. Encumbrance (longer the asset encumbered, the more stable funding required) 3. Type of counterparty (higher stable funding to non-financial counterparties compared to financial counterparties; financial companies have alternate funding arrangements and are less likely to renew the loans in stress) Intelligent Risk - July 2021
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