Via Harvard Law School – Editor’s Note: “Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds and Azad Ali. The complete publication, including annex, is available here.”

“A key element of the Basel III framework aims to ensure the maintenance and stability of funding and liquidity profiles of banks’ balance sheets. Two liquidity standards, the “net stable funding ratio” and a “liquidity coverage ratio”, were introduced in the Basel III framework to achieve this aim. Final standards on the net stable funding ratio have recently been released. Despite the implementation date of January 2018, banking institutions are considering the full impact of these measures on all aspects of their businesses now. The purpose of the net stable funding ratio (“NSFR”) is to ensure that banks hold a minimum amount of stable funding based on the liquidity characteristics of their assets and activities over a one year horizon. The objective is to reduce maturity mismatches between the asset and liability items on the balance sheet and thereby reduce funding and rollover risk. By contrast, the shorter term liquidity coverage ratio (“LCR”) requires banks to hold enough high quality liquid assets (such as government bonds) which can, if needed, be converted easily into cash in private markets to survive a 30 day stress scenario. The Basel Committee on Banking Supervision (the “Basel Committee”) published final standards relating to the LCR in January 2013. Final NSFR standards (“NSFR Standards”) were released by the Basel Committee on 31 October 2014. he NSFR Standards set out the framework for calculating the NSFR. They are largely based on the proposed standards issued earlier on 12 January 2014 but include a few notable changes from the earlier proposals. The NSFR works with and counterbalances the cliff edge effects of the LCR. It restricts the ability of banks to fund liquid assets with short term funding maturing just outside of the LCR’s 30 day time horizon. The NSFR is calculated by dividing a bank’s available stable funding (“ASF”) by its required stable funding (“RSF”). The ratio must always be greater than 100%.”