The Basel Committee has finalized the net stable funding ratio (NSFR) designed in concert with the liquidity coverage ratio (LCR) to complete the liquidity requirements of the Basel III reform package. The NSFR covers liquidity risk between the thirty-day horizon addressed by the LCR and that over 364 days, seeking to ensure that banks match funding sources and high-quality liquid assets (HQLAs) to likely outflows so that obligations can be met even under acute stress. Like the LCR, the NSFR presumes that funding from retail customers and small-businesses is inherently “stickier” than wholesale funding, continuing the LCR’s push towards a more traditional, deposit-driven structure for banks. Like the LCR, it also increases the need for banks to hold HQLAs, perhaps contributing to potential shortages of them and greater capital pressure on banks due to the leverage rules. Core deposits can be deployed to fund HQLAs, and ensure compliance with the NSFR, but at the cost of holding other, more profitable and perhaps riskier assets. Derivatives, securities-financing, and central clearing will come under pressure as the NSFR is implemented, posing challenges for capital-markets banks and for regulatory efforts to normalize monetary policy and promote derivatives and related reforms.
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