The Reserve Bank of India on 28 May 2015 released the Draft Guidelines on Net Stable Funding Ratio (NSFR) under Basel III Framework on Liquidity Standards for banks.
The Reserve Bank proposed to make NSFR applicable to all banks in India from 1 January 2018. The objective of NSFR is to ensure that banks maintain a stable funding profile in relation to their assets and off-balance sheet activities.
A sustainable funding structure can reduce the probability of erosion of a bank’s liquidity position due to disruptions in its regular sources of funding that would increase the risk of its failure and potentially lead to broader systemic stress.
The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on-off balance sheet items and promotes funding stability.
What is NSFR?
Net Stable Funding Ratio (NSFR) is defined as the amount of available stable funding relative to the amount of required stable funding.
It measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.
In particular, the NSFR standard is structured to ensure that investment banking inventories, off-balance sheet exposures, securitisation pipelines.
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 this regard, the Basel III: International framework for liquidity risk measurement, standards and monitoring was issued in December 2010 which presented the details of global regulatory standards on liquidity. The Basel Committee on Banking Supervision issued the final rules on the Net Stable Funding Ratio (NSFR) in October 2014.
Two minimum standards- Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for funding liquidity were prescribed by the Basel Committee for achieving two separate but complementary objectives.
The RBI has already started phasing in implementation of the Liquidity Coverage Ratio (LCR) from January 2015.
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When: 28 May 2015