Basel Committee Adopts Net Stable Funding Ratio: How Much Liquidity Is Enough?
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Key takeaways
- The NSFR, finalized by the Basel Committee on October 31, 2014, adds another piece to the liquidity regulation of international banking organizations by seeking to improve the funding profiles of banking organizations by requiring reliance on funding sources determined to be sufficiently stable and longer term in nature. This differs from the recently finalized LCR, which focuses on 30-day liquidity needs of banking organizations.
- The NSFR achieves its goals by establishing categories of available stable funding (the numerator) and required stable funding (the denominator) and requiring banking organizations to maintain that ratio at or above 1. Available stable funding is composed of liabilities and capital, while required stable funding is composed of assets and off-balance sheet activities. The values in each category are subject to different multipliers to accommodate the perceived stability and tenor.
- As with the LCR, compliance with the NSFR likely will increase the costs of certain activities of the consolidated banking organization, including securities finance, proprietary trading and various types of traditional lending. These impacts will affect various businesses of the broker-dealer affiliates within the banking organization.