In addition to Liquidity Coverage ratio (LCR), BCBS also introduced the Net Stable Funding Ratio (NSFR) to deal with post-crisis situation after the Great Recession of 2007-2008. While LCR aimed at short-term liquidity resilience for banks, Net Stable Funding Ratio (NSFR) was introduced as a standard requirement for banks to hold stable funding to cover the duration of their long-term assets. Like LCR, bank need to maintain a 100% ratio to satisfy NSFR requirements.
In Basel’s words, “The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding.” This brings us to the formula representation of the proportion as below:
NSFR = Available amount of stable funding/Required amount of stable funding ≥ 100%
In the above formula, Stable funding is defined as “types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress”. The stable funding needed is more expensive and will drive down the profitability of bank’s lending activities. Potential impacts on banks and the financial industry can be foreseen: