Basel III: the Net Stable Funding Ratio

The Basel Committee has issued proposed revisions to the Basel framework's Net Stable Funding Ratio (NSFR), following endorsement on 12 January 2014 by its governing body - the Group of Central Bank Governors and Heads of Supervision  (GHOS).

The NSFR is an essential component of the Basel III reforms to promote a more resilient banking sector. It is designed to ensure that banks maintain a stable funding profile in relation to the characteristics of their on- and off-balance sheet activities. A robust funding structure reduces the likelihood that a bank's liquidity position deteriorates, due to disruptions to its regular sources of funding, in a way that would lead to increased risk of failure and, potentially, to broader systemic stress. In particular, the NSFR limits over-reliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.

Proposals on the NSFR were first published in 2009, and the measure was included in the Basel III agreement in December 2010.  At that time, the Basel Committee put in place a rigorous process to review the standard and its implications for financial market functioning and the economy.

The revisions to the NSFR developed and agreed by the Basel Committee include reducing cliff effects within the measurement of funding stability, improving the alignment of the NSFR with the Liquidity Coverage Ratio (LCR), and altering the calibration of the NSFR to focus greater attention on short term, potential volatile funding sources.

The Committee welcomes comments on all aspects of this consultative document. Comments should be uploaded by Friday 11 April 2014. All comments may be published on the website of the Bank for International Settlements unless a respondent marks their comment as confidential.