What it means
Banks earn money by borrowing short and lending long, which works until the short-term funding disappears. The NSFR was introduced after the 2008 financial crisis as part of the Basel III reforms to put a floor under how far a bank can push that mismatch.
The calculation has two sides. Available stable funding takes each source of money, such as equity, retail deposits and wholesale borrowing, and multiplies it by a factor reflecting how likely it is to stay put; required stable funding does the same to assets, based on how hard each would be to sell or how long it is locked up.
Equity attracts a 100% factor because it never runs, ordinary retail deposits sit around 90% to 95% because households rarely move in a herd, and short-term funding from other financial institutions attracts a low factor because it is the first to leave. On the asset side, cash requires almost no stable funding while a thirty year mortgage requires a great deal.
This matters beyond the banking sector because it shapes what banks are willing to offer. A rule that makes long-dated lending expensive in funding terms influences mortgage pricing, the availability of long-term corporate loans and the rates offered on term deposits.
The measure is reported quarterly to regulators and sits alongside the liquidity coverage ratio, which covers a thirty day stress rather than a one year horizon. A bank comfortably above 100% on both is not automatically safe, but a bank drifting towards the line is usually already adjusting its balance sheet.
In practice
Real-world examples.
Example
A retail bank plans to grow its mortgage book by $3bn. Because mortgages carry a high required stable funding factor, the treasury team must first raise matching long-term funding, so a term deposit campaign is launched before the lending push.
Example
A bank's NSFR slips from 112% to 104% after it replaces maturing five year bonds with cheaper three month borrowing. The regulator asks for a remediation plan, and the bank issues new longer-dated debt despite the higher coupon.
Example
A treasury team compares two funding options at similar cost: a two year bond and a rolling ninety day facility. The bond scores far better for stable funding purposes, so it wins even though the headline rates are close.
Think of it
“NSFR checks if your funding will remain stable for a year-long-term funding match.
Formula
Calculation
NSFR = Available Stable Funding / Required Stable Funding, and the result must be at least 100%.
Take a mid-sized bank. On the funding side it has $4bn of equity at a 100% factor, giving $4bn; $20bn of stable retail deposits at 95%, giving $19bn; $8bn of less stable retail deposits at 90%, giving $7.2bn; and $12bn of short-term wholesale funding at 50%, giving $6bn.
Available stable funding = $4bn + $19bn + $7.2bn + $6bn = $36.2bn.
On the asset side it holds $3bn of cash at a 0% factor, giving nil; $5bn of government bonds at 5%, giving $0.25bn; $22bn of residential mortgages at 65%, giving $14.3bn; $14bn of corporate loans at 85%, giving $11.9bn; and $2bn of other assets at 100%, giving $2bn.
Required stable funding = $0bn + $0.25bn + $14.3bn + $11.9bn + $2bn = $28.45bn.
NSFR = $36.2bn / $28.45bn = 1.272, or 127%, comfortably above the 100% minimum.Case study
Seen in the real world.
This fictional illustration features Northgate Mutual Bank, an invented regional lender. Its NSFR had sat around 118% for years, until a strategy to win business banking market share began replacing sticky household deposits with larger corporate balances.
Corporate operating deposits attract a lower available stable funding factor than retail savings, so even though total deposits rose, available stable funding fell by roughly $1.4bn. At the same time the bank was writing more commercial property loans, which pushed required stable funding up, and the ratio fell to 103% within four quarters.
Northgate responded by issuing $2bn of three year senior notes and launching a two year fixed savings product for retail customers, which lifted available stable funding well above where it started. The illustrative lesson is that funding quality, not just funding volume, determines how much lending a bank can safely support.
Watch out
Common mistakes.
- Assuming any deposit counts as stable funding, when a large corporate balance that can leave overnight is treated very differently from a household savings account.
- Reading the NSFR as a measure of profitability or solvency, when it only describes the match between funding durability and asset commitment.
- Confusing it with the liquidity coverage ratio, which tests a thirty day stress rather than a one year funding horizon.
Questions
People also ask.
Who has to comply with the NSFR?
Internationally active banks under Basel III rules, with national regulators deciding how far the requirement extends to smaller institutions.
Why is the minimum 100%?
It is the point at which a bank's stable funding at least matches what its assets require, so it is not relying on short-term money to fund long-term lending.
Does a higher ratio always mean a better bank?
Not necessarily, because holding excess long-term funding is expensive and can drag on returns, so most banks target a modest buffer above the minimum.
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