Two weighted sums and a division. The work is in the factors, and in the two drifts that are each harmless alone.
The net stable funding ratio is available stable funding divided by required stable funding, and it must be at least 100 per cent. Weight every liability by how likely it is to stay for a year and every asset by how much of it needs funding for a year, then divide: on an illustrative 62 billion balance sheet that gives 42,900 over 36,600, an NSFR of 117.21 per cent. Replace 6,000 of stable retail deposits with short-term interbank money and move 30 per cent of the mortgages above a 35 per cent risk weight, and it falls to 98.73.
Worked in full in Financial Regulation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The bank is fictional and the balances illustrative, in millions. The factors are those of the Basel Committee's NSFR standard. National implementations follow it closely but differ on some lines, so check the local text before reusing a factor. The EU's CRR2 is an example: it gives unencumbered Level 1 assets other than extremely high quality covered bonds an RSF factor of 0 per cent rather than 5, which on this balance sheet removes 325 of required funding and reads 118.26 per cent instead of 117.21.
Each liability and capital item is multiplied by its available stable funding (ASF) factor. Capital and funding with a year or more to run count in full. Retail deposits count at 95 per cent if stable (insured and in an established relationship or transactional account) and 90 per cent otherwise. Operational deposits and corporate funding under a year count at half. Funding from financial institutions with less than six months to run counts for nothing.
| Liability | Amount | ASF factor | ASF |
|---|---|---|---|
| Regulatory capital | 5,500 | 100% | 5,500 |
| Senior bonds, one year or more | 3,000 | 100% | 3,000 |
| Stable retail deposits | 18,000 | 95% | 17,100 |
| Less stable retail deposits | 12,000 | 90% | 10,800 |
| Operational deposits | 4,000 | 50% | 2,000 |
| Corporate deposits, under one year | 9,000 | 50% | 4,500 |
| Funding from financial institutions, under six months | 9,000 | 0% | 0 |
| Other liabilities | 1,500 | 0% | 0 |
| Total | 62,000 | 69.2% | 42,900 |
Each asset is multiplied by its required stable funding (RSF) factor, which rises with illiquidity and maturity. Cash and central bank reserves need nothing. Unencumbered Level 1 securities need 5 per cent and Level 2A 15. Loans under a year need half; residential mortgages of a year or more need 65 per cent if they would qualify for a standardised risk weight of 35 per cent or less, and 85 per cent otherwise, the same as other performing loans. Undrawn committed facilities add 5 per cent of the nominal.
| Asset | Amount | RSF factor | RSF |
|---|---|---|---|
| Cash and central bank reserves | 4,000 | 0% | 0 |
| Level 1 securities, unencumbered | 6,500 | 5% | 325 |
| Level 2A securities | 1,500 | 15% | 225 |
| Loans to financial institutions, under six months | 2,000 | 15% | 300 |
| Loans to customers, under one year | 7,000 | 50% | 3,500 |
| Residential mortgages, risk weight 35% or less | 18,000 | 65% | 11,700 |
| Other performing loans, one year or more | 19,000 | 85% | 16,150 |
| Other assets | 4,000 | 100% | 4,000 |
| Committed facilities, undrawn (off balance sheet) | 8,000 | 5% | 400 |
| Total | 62,000 | 59.0% | 36,600 |
NSFR = available stable funding / required stable funding ≥ 100%
= 42,900 / 36,600 = 117.21 per cent, a surplus of 6,300
Excel: =SUMPRODUCT(LiabAmt,ASF)/(SUMPRODUCT(AssetAmt,RSF)+SUMPRODUCT(OffAmt,OffRSF))
The surplus of 6,300 is the real headroom, more useful than the percentage. Read it as: the bank could lose 6,632 of stable retail deposits, 36.8 per cent of them, and replace them with short interbank money before the ratio touched 100.
Two pressures are worth running. The first is funding mix: stable retail deposits leave and are replaced by funding from financial institutions under six months, each unit costing 0.95 of ASF. The second comes from the capital rules. Where mortgages are risk-weighted by splitting the loan at 55 per cent of the property value, as under the EU's CRR3, a high loan-to-value mortgage can carry a weight above 35 per cent, and every such mortgage moves from the 65 to the 85 per cent RSF factor. The mechanics are in how loan splitting sets a mortgage risk weight.
| Scenario | ASF | RSF | NSFR |
|---|---|---|---|
| Base | 42,900 | 36,600 | 117.21 |
| 13% of mortgages above a 35% weight | 42,900 | 37,068 | 115.73 |
| 30% of mortgages above a 35% weight | 42,900 | 37,680 | 113.85 |
| 50% of mortgages above a 35% weight | 42,900 | 38,400 | 111.72 |
| 3,000 of stable retail replaced by interbank | 40,050 | 36,600 | 109.43 |
| 6,000 of stable retail replaced by interbank | 37,200 | 36,600 | 101.64 |
| Both: 6,000 replaced and 30% of mortgages | 37,200 | 37,680 | 98.73 |
Neither pressure breaks the ratio alone. Together they do. That is the shape of most NSFR problems: a capital rule and a funding drift that are each monitored by a different team, and no one adds them up.
The first mistake is applying the off-balance-sheet RSF factor to the converted exposure from the capital calculation rather than to the nominal. With a 40 per cent conversion factor the facilities would add 160 instead of 400, and the ratio would read 117.99 per cent. The conversion factor belongs to the capital ladder; the NSFR reads the full undrawn amount. The second is classifying all retail deposits as stable: putting the 12,000 of less stable deposits at 95 per cent adds 600 of ASF and lifts the ratio to 118.85, on a classification a supervisor will test against insurance coverage and relationship evidence. The third is treating the mortgage factor as fixed. It follows the risk weight, and the risk weight follows loan-to-value.
The NSFR is a one-year structural measure; the 30-day survival measure is the LCR. A bank can pass one and fail the other, and the encumbrance of a liquidity buffer changes both. See the LCR when part of the buffer is pledged.
Both liquidity ratios, with the mortgage weights computed band by band and the off-balance-sheet lines on their nominal, are live in the free workbook for this case.
Under the Basel standard, stable retail and small business deposits get 95 per cent, less stable ones 90 per cent, operational deposits and non-financial corporate funding under a year 50 per cent, and funding from financial institutions under six months 0 per cent. On the illustrative bank here, 18,000 of stable retail deposits provide 17,100 of available stable funding while 9,000 of short interbank money provides none.
Because the required stable funding factor for a residential mortgage of a year or more is 65 per cent only if it would qualify for a standardised risk weight of 35 per cent or less; otherwise it is 85 per cent. On 18,000 of mortgages, moving 30 per cent of them above that weight adds 1,080 of required funding and cuts the NSFR from 117.21 to 113.85 per cent.
The LCR asks whether high-quality liquid assets cover 30 days of stressed net outflows. The NSFR asks whether stable funding covers the assets that need funding over one year. Both have a 100 per cent minimum. The illustrative bank here has an NSFR of 117.21 per cent, which says nothing about whether it would survive a month of deposit outflows.
This article is one calculation from Financial Regulation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: regulation, compliance and banking → · All 453 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.