Liquidity
July 21, 2025
Since its introduction, alongside the LCR, the Net Stable Funding Ratio (NSFR) has gained prominence among regulators and banks worldwide, including within the European financial system. In this article, we take an in-depth look at how the ratio is constructed, what assets and liabilities are involved, and its practical impact on bank liquidity risk management.
The NSFR (Net Stable Funding Ratio) is one of the fundamental pillars of the banking regulation promoted in the wake of the 2008 global financial crisis. This metric, part of the Basel III framework, aims to strengthen the long-term financial stability of the banking system by ensuring that institutions maintain a sustainable balance between their funding sources and the liquidity profile of their assets.
Why Was the Net Stable Funding (NSFR) Created?
During the 2008 crisis, the fragility of banking systems in the face of prolonged liquidity stress became evident. Many global banks were overly reliant on short-term funding, making them highly vulnerable when money markets froze or trust between institutions deteriorated.
To address this issue, the Basel Committee on Banking Supervision designed two complementary liquidity ratios:
- The LCR (Liquidity Coverage Ratio): Assesses a bank’s ability to cover cash outflows during a 30-day stress period.
- The NSFR (Net Stable Funding Ratio): Ensures that a bank’s assets are funded with stable sources over a one-year horizon.
How Is the NSFR Calculated?
The NSFR compares the amount of available stable funding to the amount of required stable funding, based on the composition and risk profile of a bank’s assets.
Basic formula:
This means that banks must have enough stable funding sources to cover at least 100 percent of their needs over a 12-month period.
Available Stable Funding (ASF): Composition of the Numerator
Available Stable Funding (ASF) refers to the portion of a bank’s capital and liabilities considered reliable over a one-year horizon. To calculate ASF, the book value of the bank’s capital and liabilities is allocated into five categories based on stability, each with an assigned ASF factor reflecting its reliability.
The weighted amounts are then summed to determine total ASF, which forms the numerator of the NSFR.
Below is a summary of the main funding sources and their corresponding ASF factors.
| Categories of Liabilities and their ASF Factors |
| Liabilities with a 100% factor: |
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| Liabilities with a 95% factor: |
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| Liabilities with a 90% factor: |
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| Liabilities with a 50% factor: |
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| Liabilities with a 0% factor: |
|
Required Stable Funding (RSF): Composition of the Denominator
The denominator of the Net Stable Funding Ratio (NSFR) reflects the amount of stable funding a bank must maintain to support its assets and off-balance-sheet exposures. This is calculated by multiplying the book value of each asset category by a Required Stable Funding (RSF) factor, which varies based on the asset’s liquidity, risk profile, and maturity.
The total RSF is the sum of these weighted amounts, including the weighted value of off-balance-sheet exposures.
Below is a summary of the asset categories and their corresponding RSF factors that together constitute the NSFR denominator:
| Categories of Assets and their RSF Factors |
| Assets with a 0% RSF factor: |
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| Assets with a 15% RSF factor: |
|
| Assets with a 50% RSF factor: |
|
| Assets with a 65% RSF factor: |
|
|
Assets with an 85% RSF factor: |
|
| Assets with a 100% RSF factor: |
|
| Off-balance-sheet exposures |
|
These include credit lines and guarantees, which also require stable funding. They usually receive an RSF of 5% to 10%, depending on the nature and revocability of the commitment. |
NSFR Implementation in Europe: Adapting to the Regulatory Environment
In the European Union, the Net Stable Funding Ratio (NSFR) was implemented as part of the broader regulatory package aligned with the Basel III framework. Since June 2021, the ratio has been mandatory and is reported quarterly to European banking supervisors. This harmonized approach ensures consistent application across the region and strengthens oversight of structural liquidity risk.
What Is the Relationship Between the European NSFR and the Basel NSFR?
Building on the understanding of why the NSFR was created and its crucial role, it’s essential to explore how the European NSFR relates to the original Basel NSFR framework. The answer, as the relationship, is direct: the NSFR of the European banking system is a transposition of the model designed by the Basel Committee, with some technical adjustments and more precise definitions tailored to the European regulatory environment. Both share the same objective: to reduce the risk of banks being unable to refinance their assets during prolonged periods of financial stress.
The European framework aims to maintain international consistency while allowing some flexibility in the application of requirements, always under the supervision of the European Banking Authority (EBA) and the European Central Bank (ECB), which ensure regional financial stability while aligning with global standards.
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