Continuing its build-out of global liquidity standards for banking organizations, the Basel Committee has proposed a more complete version of the net stable funding ratio (NSFR) than included in the 2010 Basel III framework. The NSFR is designed to ensure that banks have sufficient high-quality liquid assets (HQLAs) to withstand liquidity stress over a one-year period. It is a minimum ratio, permitting nations like the U.S. to impose more stringent requirements on some or all internationally-active banks if desired, but wide variations in practice could remain even after Basel finalizes the NSFR due to strong opposition to it in the European Union and other venues due to its significant cost. A wide array of funding products and off-balance sheet structures could be adversely affected, creating a significant strategic challenge and possibly driving certain products to non-bank, “shadow” entities not covered by comparable liquidity rules.
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