Net Stable Funding Ratio: Final Rule

Summary

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) today published a final rule in the Federal Register that implements the net stable funding ratio (NSFR). The NSFR, a quantitative liquidity metric and requirement, measures the stability of a covered company’s funding profile over a one-year time horizon and complements the liquidity coverage ratio (LCR) rule, which was finalized by the agencies in 2014. The final NSFR rule is designed to strengthen the ability of covered companies to withstand disruptions to their regular sources of funding without compromising their liquidity position or contributing to instability in the financial system.

The final rule will be effective on July 1, 2021.

Highlights

Under the final rule, a covered company includes a U.S. depository institution holding company, depository institution, or a U.S. intermediate holding company of a foreign banking organization with more than $100 billion in total consolidated assets that meet certain asset size and risk factor requirements. The final rule

• implements a minimum stable funding requirement designed to reduce the likelihood that disruptions to a covered company’s regular sources of funding will compromise its liquidity position.
• requires a covered company subject to the full NSFR to maintain a ratio of “available stable funding” to “required stable funding” of at least 1.0 on an ongoing basis.
• measures “available stable funding” by evaluating the stability of a banking organization’s funding sources.
• measures “required stable funding” by evaluating the liquidity characteristics of a banking organization’s assets, derivatives, and off-balance-sheet exposures.
• requires a covered company to notify its appropriate federal banking agency supervisor of a shortfall or potential shortfall within 10 business days of any event that caused or would cause the covered company’s NSFR to fall below the minimum requirement and to submit a remediation plan.
• requires a covered company that is a depository institution holding company, U.S. intermediate holding company, or covered nonbank company to publicly disclose its consolidated NSFR and certain components of its NSFR in a standardized format on a quarterly basis.

The final rule promotes a sustainable funding structure intended to reduce the likelihood that disruptions to a covered company’s regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The final rule limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance-sheet items, and promotes funding stability. The NSFR requirements in the final rule are consistent with the requirements established by the Basel Committee on Banking Supervision (BCBS).

Background

In response to the financial crisis that started in 2007, the BCBS established two quantitative standards for liquidity in 2010. The Basel III Liquidity Framework¹ introduced the Basel III LCR, its first international quantitative liquidity standard, to mitigate the risks that arise when banking organizations face significantly increased net cash outflows in a short-term period of stress. The framework also introduced the Basel III NSFR, which complements the LCR and promotes resilience by mitigating the risks presented by banking organizations supporting their assets with insufficiently stable funding. The NSFR has a longer, one-year time horizon and was developed to promote a sustainable maturity structure of assets and liabilities on an ongoing basis.

Further Information

Please contact Christopher McBride, Director; or James Weinberger, Technical Expert, Treasury and Market Risk Policy, at (202) 649-6360. Also contact Henry Barkhausen, Counsel; or Daniel Perez, Counsel, Chief Counsel’s Office, at (202) 649-5490.

Jonathan V. Gould
Senior Deputy Comptroller and Chief Counsel

Related Link

• “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements” (PDF)