Daily News: November 3, 2014

Basel Committee Finalizes Net Stable Funding Ratio

The Basel Committee on Banking Supervision has issued the final standard for the Net Stable Funding Ratio (NSFR), as endorsed by the Committee’s governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS).

The NSFR is a significant component of the Basel III reforms. It requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thus reducing the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure and potentially lead to broader systemic stress. The NSFR will become a minimum standard by 1 January 2018. The Committee is currently developing disclosure standards for the NSFR and expects to publish them for consultation around year end.

Stefan Ingves, chairman of the Basel Committee and governor, Sveriges Riksbank, said, “A key lesson from the crisis has been the need to prevent overreliance on short-term, volatile sources of funding. The NSFR does this by limiting the use of volatile short-term borrowings to fund illiquid assets. In finalizing the standard, the Committee has essentially completed its regulatory reform agenda, undertaken to promote a more resilient banking sector following the financial crisis.”

The final NSFR retains the structure of the January 2014 consultative proposal. The key changes introduced in the final standard published today cover the required stable funding for:

  • Short-term exposures to banks and other financial institutions;
  • Derivatives exposures; and
  • Assets posted as initial margin for derivative contracts.

In addition, the final standard recognizes that, under strict conditions, certain asset and liability items are interdependent and can therefore be viewed as neutral in terms of the NSFR.

To read the entire Basel press release, click here.

To read a related Bloomberg article, click here.