The net stable funding ratio (NSFR) is a Basel III liquidity rule that asks banks to fund their assets with enough stable money to last a one-year horizon. It divides available stable funding (capital, long-term debt, sticky deposits) by required stable funding (assets weighted by how hard they are to sell or roll over), and the result must be at least 100%. The Basel Committee set it as a minimum standard by 1 January 2018; the US rule took effect on 1 July 2021.
How it works
01
Weight the funding
Regulatory capital and liabilities due in a year or more count in full. In the US rule, stable retail deposits count at 95% and other non-brokered retail deposits at 90%; short-term wholesale money counts for less.
02
Weight the assets
Cash and central bank reserves need almost no stable funding. Long-term loans and hard-to-sell assets need much more, because the bank cannot turn them into cash quickly.
03
Compare the two
If weighted stable funding covers weighted needs, the ratio is at least 100% and the bank passes.
04
Pair it with the LCR
The liquidity coverage ratio tests a 30-day stress. The NSFR covers the longer-term funding profile, so a bank cannot finance long assets with overnight money.
Where you see it today
US rule since July 2021
US banking agencies finalised their NSFR rule in October 2020 for large banks, effective 1 July 2021. Covered firms must keep the ratio equal to or greater than 1.0 on an ongoing basis, and holding companies disclose their NSFR semiannually from 2023.
On 9 March 2023 Silicon Valley Bank lost over $40 billion in deposits, and management expected over $100 billion more the next day. The Federal Reserve’s review said social media, a concentrated depositor base and technology may have fundamentally changed the speed of bank runs.
Rethinking how sticky deposits are
The Basel Committee called the turmoil that started in March 2023 the most significant system-wide banking stress since the global financial crisis in terms of scale and scope. The Fed’s review of Silicon Valley Bank described uninsured deposits withdrawn in a coordinated manner by a concentrated network of depositors, which tests how stable ‘stable’ funding really is.
Revisiting which banks are covered
After the failure, the Fed’s Vice Chair for Supervision said the Fed planned to revisit its tailoring framework and re-evaluate a range of rules for banks with $100 billion or more in assets.
NSFR vs related bank ratios
Net stable funding ratio
What it testsStable funding vs long-term funding needs
HorizonOne year
Liquidity coverage ratio
What it testsLiquid assets vs stressed cash outflows
Horizon30 days
Capital adequacy ratio
What it testsCapital vs risk-weighted assets
HorizonSolvency, no fixed horizon
Loan-to-deposit ratio
What it testsLoans vs deposits (simple, unweighted)
HorizonPoint in time
How to use it
When you read a bank's results, find the disclosed NSFR next to the LCR and check both sit above 100%.
Look at what drives available stable funding: insured retail deposits are weighted far above short-term wholesale money.
Check how concentrated the depositor base is; one industry or one network can leave together.
Ask how much of the asset book is long-dated loans or securities that need stable funding behind them.
If you run a company's treasury, spread cash across banks and know which deposits are insured.
The Business Engineer lens
The NSFR prices time: assets that tie up money for years must be funded by money that stays for years. As deposits move at app speed, the Business Engineer reads funding stability as a network question as much as a balance-sheet one.
The complete explainer, cleaned up and reformatted for mobile.
Drawing by The Business Engineer.
FourWeekMBABusiness EngineerAt a glance
The NSFR is calculated by dividing the available stable funding (ASF) by the required stable funding (RSF).
The NSFR is expressed as a ratio, and the Basel III framework prescribes a minimum NSFR requirement of 100%.
Banks with a higher proportion of stable funding, such as retail deposits and long-term borrowings, are more likely to have a favorable NSFR.
The Net Stable Funding Ratio (NSFR) is a vital component of the Basel III framework and serves as a critical tool for promoting liquidity resilience and financial stability within the banking industry.
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Why it mattersFrom the article
The NSFR helps prevent such fire sales, which can exacerbate market turmoil.
Compliance with the NSFR is not only a regulatory requirement but also an essential element of prudent risk management for banks.
Net Stable Funding Ratio (NSFR) is a regulatory requirement ensuring banks maintain stable funding to mitigate liquidity risk over one year. It involves calculating Available Stable Funding (ASF) and Required Stable Funding (RSF) to meet a minimum ratio set by regulators. NSFR contributes to financial stability but poses challenges like compliance costs and complexity in implementation. It's a key component of Basel III and widely adopted by regulatory authorities worldwide.
Visual Overview
Key Components
What is the Net Stable Funding Ratio (NSFR)?
The Net Stable Funding Ratio (NSFR) is a regulatory requirement that measures a bank's long-term stability of funding sources relative to the liquidity of its assets and off-balance-sheet activities.
Calculation of NSFR
The NSFR is calculated by dividing the available stable funding (ASF) by the required stable funding (RSF). The formula for the NSFR is as follows:
Significance of NSFR
The Net Stable Funding Ratio (NSFR) holds significant importance in the realm of banking and financial regulation for several reasons:
Factors Affecting NSFR
Several factors can influence a bank's Net Stable Funding Ratio (NSFR). Understanding these factors is essential for banks to manage and maintain compliance with regulatory requirements. Here are some key factors that can affect NSFR:
Managing and Maintaining NSFR
To manage and maintain compliance with the Net Stable Funding Ratio (NSFR) requirements, banks employ various strategies and practices:
Conclusion
The Net Stable Funding Ratio (NSFR) is a vital component of the Basel III framework and serves as a critical tool for promoting liquidity resilience and financial stability within the banking industry.
Real-World Examples
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Quick Answers
What is the Net Stable Funding Ratio (NSFR)?
The Net Stable Funding Ratio (NSFR) is a regulatory requirement that measures a bank's long-term stability of funding sources relative to the liquidity of its assets and off-balance-sheet activities.
What is Calculation of NSFR?
The NSFR is calculated by dividing the available stable funding (ASF) by the required stable funding (RSF). The formula for the NSFR is as follows:
What is Significance of NSFR?
The Net Stable Funding Ratio (NSFR) holds significant importance in the realm of banking and financial regulation for several reasons:
Key Insight
The Net Stable Funding Ratio (NSFR) is a vital component of the Basel III framework and serves as a critical tool for promoting liquidity resilience and financial stability within the banking industry. It measures a bank's ability to fund its illiquid assets and off-balance-sheet exposures over a one-year horizon with stable sources of funding.
The Net Stable Funding Ratio (NSFR) is a regulatory requirement that measures a bank’s long-term stability of funding sources relative to the liquidity of its assets and off-balance-sheet activities. In simpler terms, it assesses whether a bank has enough stable funding to support its illiquid assets over a prolonged period, typically one year.
The NSFR is designed to mitigate the risk of bank runs and liquidity crises by ensuring that banks maintain an appropriate balance between their short-term and long-term funding sources. By doing so, it promotes greater financial stability and reduces the likelihood of institutions facing insolvency due to a sudden loss of liquidity.
Calculation of NSFR
The NSFR is calculated by dividing the available stable funding (ASF) by the required stable funding (RSF). The formula for the NSFR is as follows:
Where
ASF (Available Stable Funding) represents the amount of stable funding sources that a bank has to support its illiquid assets and off-balance-sheet exposures over a one-year horizon. These stable funding sources are typically more reliable and less prone to sudden withdrawals.
RSF (Required Stable Funding) represents the weighted sum of a bank’s illiquid assets and off-balance-sheet exposures, each multiplied by a specific factor that reflects their liquidity risk. The RSF captures the potential outflow of funds associated with these assets and exposures.
The NSFR is expressed as a ratio, and the Basel III framework prescribes a minimum NSFR requirement of 100%. This means that a bank must have at least as much available stable funding as required stable funding to meet the regulatory standard.
Significance of NSFR
The Net Stable Funding Ratio (NSFR) holds significant importance in the realm of banking and financial regulation for several reasons:
Promoting Liquidity Resilience: The NSFR is a crucial tool for promoting liquidity resilience in banks. By ensuring that institutions maintain a stable funding base, it reduces their vulnerability to sudden liquidity shocks and bank runs.
Preventing Fire Sales: In times of financial stress, banks without adequate stable funding may be forced to sell illiquid assets at distressed prices to meet withdrawal demands. The NSFR helps prevent such fire sales, which can exacerbate market turmoil.
Aligning Funding Structure: The regulation encourages banks to align their funding structure with the liquidity profile of their assets. This discourages excessive reliance on short-term, potentially volatile funding sources.
Enhancing Financial Stability: The NSFR contributes to overall financial stability by reducing the likelihood of systemic crises. It helps create a more resilient banking system less prone to contagion effects.
Meeting Regulatory Requirements: Compliance with the NSFR is a regulatory requirement for banks, and non-compliance can result in penalties and restrictions on their operations. Therefore, it is a critical aspect of banking supervision.
Factors Affecting NSFR
Several factors can influence a bank’s Net Stable Funding Ratio (NSFR). Understanding these factors is essential for banks to manage and maintain compliance with regulatory requirements. Here are some key factors that can affect NSFR:
Funding Mix: The composition of a bank’s funding sources is a significant factor. Banks with a higher proportion of stable funding, such as retail deposits and long-term borrowings, are more likely to have a favorable NSFR.
Asset Liquidity: The liquidity profile of a bank’s assets plays a critical role. Illiquid assets, such as long-term loans or investments, may require more stable funding to meet the NSFR requirements.
Off-Balance-Sheet Exposures: Off-balance-sheet activities, such as contingent liabilities or commitments, can impact the NSFR. These exposures are subject to RSF factors that influence the required stable funding.
Market Conditions: Changing market conditions, including shifts in interest rates or funding costs, can affect a bank’s NSFR. Unforeseen changes may require adjustments to funding strategies.
Regulatory Changes: Amendments to regulatory standards or NSFR calculation methodologies can impact compliance. Banks must stay informed about regulatory updates and adapt their practices accordingly.
Managing and Maintaining NSFR
To manage and maintain compliance with the Net Stable Funding Ratio (NSFR) requirements, banks employ various strategies and practices:
Diversified Funding Sources: Banks aim to diversify their funding sources to include a mix of stable funding, such as retail deposits and long-term debt, and less stable sources. Diversification reduces reliance on short-term funding.
Asset-Liability Management (ALM): Banks engage in ALM practices to align the maturities and liquidity profiles of their assets and liabilities. This helps ensure that assets are funded adequately over time.
Capital Allocation: Proper allocation of capital to support illiquid assets is essential. Banks need to allocate sufficient capital to meet regulatory requirements.
Stress Testing: Stress testing exercises help banks assess their resilience to adverse scenarios and evaluate their NSFR under stressed conditions. This helps identify vulnerabilities and plan for contingencies.
Regular Reporting: Banks are required to report their NSFR to regulatory authorities regularly. Accurate and timely reporting is crucial for compliance.
Strategic Planning: Banks develop long-term strategic plans that consider NSFR compliance. These plans involve optimizing funding strategies and managing asset liquidity.
Conclusion
The Net Stable Funding Ratio (NSFR) is a vital component of the Basel III framework and serves as a critical tool for promoting liquidity resilience and financial stability within the banking industry. It measures a bank’s ability to fund its illiquid assets and off-balance-sheet exposures over a one-year horizon with stable sources of funding. Compliance with the NSFR is not only a regulatory requirement but also an essential element of prudent risk management for banks. By maintaining a balanced funding profile and aligning it with the liquidity of their assets, banks can enhance their stability and reduce the risk of liquidity crises, ultimately contributing to a safer and more robust financial system.
Basel III Framework
Description– Basel III is a global regulatory framework for banking supervision that aims to strengthen the resilience of banks and improve risk management practices. – It introduces minimum capital requirements, leverage ratios, liquidity standards, and risk-based supervision to enhance the stability and integrity of the banking system. – The Net Stable Funding Ratio (NSFR) is one of the liquidity standards introduced under Basel III to promote more sustainable funding structures for banks.
When to Apply– When assessing the liquidity risk management practices of banks and financial institutions. – To ensure banks maintain a stable funding profile over the long term to support their operations and withstand liquidity shocks. – To comply with regulatory requirements and standards set forth by Basel III for enhancing the resilience of the banking sector.
Liquidity Coverage Ratio (LCR)
Description– The Liquidity Coverage Ratio (LCR) is another liquidity standard introduced under Basel III to promote short-term resilience of a bank’s liquidity risk profile. – It requires banks to hold sufficient high-quality liquid assets to cover their net cash outflows over a 30-day stress period. – LCR complements the NSFR by addressing short-term liquidity risks, while NSFR focuses on longer-term funding stability.
When to Apply– When evaluating a bank’s short-term liquidity position and its ability to withstand liquidity stress events. – To ensure banks hold adequate liquid assets to meet their short-term obligations and maintain confidence in the banking system during periods of market stress. – To comply with regulatory requirements and standards set forth by Basel III for enhancing liquidity risk management in the banking sector.
Banking Regulation and Supervision
Description– Banking regulation and supervision refer to the oversight and control measures implemented by regulatory authorities to ensure the safety, soundness, and stability of the banking system. – Regulatory frameworks such as Basel III establish prudential standards, capital requirements, and risk management guidelines to mitigate risks and protect depositors and investors. – Supervisory authorities monitor banks’ compliance with regulations, conduct examinations, and enforce corrective actions to address deficiencies and promote financial stability.
When to Apply– When designing and implementing regulatory frameworks to enhance the resilience of the banking sector and mitigate systemic risks. – To supervise and monitor banks’ compliance with regulatory requirements and assess their risk management practices. – To maintain confidence in the banking system and safeguard the interests of depositors, investors, and the broader economy.
Funding Liquidity Risk Management
Description– Funding liquidity risk management involves assessing and managing the risk of not being able to meet funding obligations as they come due. – It includes maintaining diversified funding sources, monitoring liquidity metrics, and establishing contingency funding plans to address liquidity shortfalls. – Effective funding liquidity risk management ensures banks have sufficient funding to support their operations, withstand market disruptions, and maintain confidence in their ability to meet obligations.
When to Apply– When identifying, assessing, and mitigating funding liquidity risks within a bank or financial institution. – To establish liquidity risk tolerance limits, liquidity buffers, and contingency funding plans to manage liquidity risks effectively. – To monitor liquidity metrics, such as the NSFR, LCR, and funding concentration, and take appropriate actions to maintain funding stability and resilience.
Market Liquidity Risk
Description– Market liquidity risk refers to the risk of incurring losses or facing difficulties in executing transactions due to inadequate market depth, liquidity shortages, or disruptions in financial markets. – It arises from factors such as trading volumes, bid-ask spreads, market volatility, and investor sentiment, which affect the ease of buying or selling assets without causing significant price movements. – Banks and financial institutions are exposed to market liquidity risk in their trading, investment, and funding activities, requiring them to manage and monitor this risk effectively.
When to Apply– When assessing the impact of market liquidity conditions on a bank’s trading and investment activities. – To identify and mitigate market liquidity risk factors that could affect the bank’s ability to buy or sell assets at fair prices. – To monitor market liquidity indicators and trends to anticipate potential liquidity challenges and adjust risk management strategies accordingly.
Asset-Liability Management (ALM)
Description– Asset-Liability Management (ALM) is a strategic management process used by banks and financial institutions to optimize their balance sheets and manage interest rate, liquidity, and funding risks. – It involves aligning the composition and maturity of assets and liabilities to match cash flows, interest rate exposures, and funding requirements. – ALM frameworks incorporate liquidity risk metrics such as the NSFR to ensure banks maintain stable funding profiles and mitigate liquidity mismatches between assets and liabilities.
When to Apply– When managing the balance sheet composition, cash flows, and interest rate risks of banks and financial institutions. – To optimize the allocation of assets and liabilities to achieve strategic objectives while managing liquidity and funding risks effectively. – To integrate liquidity risk metrics such as the NSFR into ALM frameworks to ensure banks maintain liquidity resilience and regulatory compliance.
Gennaro Cuofano is a CRO and tech executive who has worked in AI since late 2015, starting with bringing NLP, natural-language generation, voice and chatbot products to the marketing industry. His background is in law and finance: he holds a Master's degree in Law and an International MBA with an emphasis on corporate finance (LUISS Business School and the University of San Diego, 2012), and worked as a financial analyst at a real-estate investment firm in San Diego and as an assistant controller. His work focuses on business model strategy, business engineering and, more broadly, structural analysis: how companies make money, read from their own filings. He created FourWeekMBA and leads research there and at The Business Engineer, his newsletter on AI and business strategy, with over 95,000 subscribers and more than 1,000 published analyses. His writing has also appeared on Entrepreneur (for example, How to Digitize a Family Business in Europe) and HackerNoon. Find him on LinkedIn and Substack. See how we source.
