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Net Stable Funding Ratio Explained

5 Jun 2016

Net Stable Funding Ratio Explained

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The article “RBI proposes net stable funding ratio for banks under Basel-III” published in the Financial Express presents key terms and information pertaining to NSFR.

The net stable funding ratio (NSFR) is one of the Basel’s committee key reforms to reduce funding risk over a longer time horizon by requiring banks tofund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding.

The amount of available stable funding is calculated as sum of multiplying weights (ASF factor) to different categories of liability and the amount of required stable funding is calculated as sum of multiplying weights (RSF factor) to institutions assets and off-balance sheet items.

Stable funding is defined as those types and amounts of equity and liability financing which are expected to be reliable sources of funds over 1-year under conditions of extended stress.

The NSFR should be equal to at least 100% and will become a minimum standard by 1 January 2018.

Available stable funding (ASF)

 

 

ASF Factor Liabilities
100% Total regulatory capital (excluding Tier 2 instruments with residual maturity of <1 year)

Other capital instruments and liabilities with effective residual maturity of >1 year

95% Stable non-maturity (demand) deposits and term deposits with residual maturity of <1 year provided by retail and small business customers
90% Less stable non-maturity deposits and term deposits with residual maturity of <1 year provided by retail and small business customers
50%

Funding with residual maturity of <1 year provided by non-financial corporate customers

Operational deposits

Funding with residual maturity of <1 year from sovereigns, Public sector enterprises, and multilateral and national development banks

Other funding with residual maturity between 6 months and <1 year not included in the above categories, including funding provided by central banks and financial institutions

0%

All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests)

NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets

“Trade date” payables arising from purchases of financial instruments, foreign currencies and commodities

 

 

Required stable funding (RSF)

RSF Factor Asset
0% Coins and banknotes

All central bank reserves

All claims on central banks with residual maturities of <6 months

“Trade date” receivables arising from sales of financial instruments, foreign currencies and commodities.

5% Unencumbered Level 1 assets, excluding coins, banknotes and central bank reserves
10% Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets, and where the bank has the ability to freely rehypothecate the received collateral for the life of the loan
15% All other unencumbered loans to financial institutions with residual maturities of less than six months not included in the above categories

Unencumbered Level 2A assets

50% Unencumbered Level 2B assets

HQLA encumbered for a period of >6 months and <1 year

Loans to financial institutions and central banks with residual maturities between 6 months and <1 year

Deposits held at other financial institutions for operational purposes

All other assets not included in the above categories with residual maturity of <1 year, including loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns and PSEs

65% Unencumbered residential mortgages with a residual maturity of >1 year and with a risk weight of less than or equal to 35% under the Standardised Approach

Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of >1 year and with a risk weight of less than or equal to 35% under the standardised approach

85% Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP

Other unencumbered performing loans with risk weights greater than 35% under the standardised approach and residual maturities of >1 year, excluding loans to financial institutions

Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of >1 year and exchange-traded equities

Physical traded commodities, including gold

100% All assets that are encumbered for a period of > 1 year

NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative assets are greater than NSFR derivative liabilities

All other assets not included in the above categories, including non-performing loans, loans to financial institutions with a residual maturity of >1 year, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities

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