Basel III Framework: Net Stable Funding Ratio (Proposed Standards)

A key new element of the Basel III framework for regulatory capital aims to improve banks' management of their funding and liquidity profiles. Two new measures are proposed: a "net stable funding ratio", and a "liquidity coverage ratio". The net stable funding ratio has received relatively little attention due to its seemingly distant implementation date of 1 January 2018. However, its impact will be immediate and significant for many banking institutions.

The net stable funding ratio ("NSFR") aims to ensure that banks hold a minimum amount of stable funding based on the liquidity characteristics of their assets and activities over a one year horizon. The aim is to reduce maturity mismatches between the asset and liability parts of the balance sheet and thereby reduce funding risk. The shorter term liquidity coverage ratio ("LCR") requires banks to hold enough liquid assets (such as government bonds) which can, if needed, be converted easily into cash in private