In the backdrop of the global financial crisis that started in 2007, the Basel Committee on Banking Supervision (BCBS) proposed certain reforms to strengthen global capital and liquidity regulations
Reserve Bank of India (RBI) has released final guidelines prescribing 100 percent net stable funding ratio (NSFR), a long-term liquidity measurement included in the Basel III liquidity standards, to ensure banks maintain adequate liquid resources for more resilience.
NSFR is defined as the amount of available stable funding (ASF) relative to the amount of required stable funding (RSF). It promotes resilience over a longer-term time horizon by requiring banks to fund their activities with more stable sources of funding on an ongoing basis.
“The above ratio should be equal to at least 100 percent on an ongoing basis. However, the NSFR would be supplemented by supervisory assessment of the stable funding and liquidity risk profile of a bank. On the basis of such assessment, the Reserve Bank may require an individual bank to adopt more stringent standards to reflect its funding risk profile and its compliance with the Sound Principles,” RBI said in a notification on Thursday.
ASF is the portion of capital and liabilities expected to be reliable over a year, while RSF is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet exposures.
Objective of NSFR
“The objective of NSFR is to ensure that banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the probability of erosion of a bank’s liquidity position due to disruptions in a bank’s regular sources of funding that would increase the risk of its failure and potentially lead to broader systemic stress,” RBI said.
It further adds, “The NSFR 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.”
LCR and NSFR
As per global regulatory standards on liquidity, there are two minimum standards for funding liquidity: NSFR and LCR or Liquidity Coverage Ratio.
RBI has started phasing in implementation of the LCR from January 2015.
LCR promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.
On the other hand, NSFR promotes resilience over a longer-term time horizon by requiring banks to fund their activities with more stable sources of funding on an ongoing basis.
In the backdrop of the global financial crisis that started in 2007, the Basel Committee on Banking Supervision (BCBS) proposed certain reforms to strengthen global capital and liquidity regulations, with the objective of promoting a more resilient banking sector.
In May 2015, the banking regulator had released draft guidelines on implementation of NSFR in Indian banks.
NSFR was slated to start by January this year as per draft guidelines but now RBI will communicate a date in due course.
“The NSFR would be applicable for Indian banks at the solo (stand-alone) as well as consolidated level. For foreign banks operating as branches in India, the framework would be applicable on stand-alone basis (i.e., for Indian operations only),” the RBI notification said.
Banks are required to meet the NSFR requirement on an ongoing basis and they should have the required systems in place for such calculation and monitoring, RBI said.The NSFR as at the end of each quarter should be reported to the RBI within 15 days from the end of the quarter.