The Basel III Net Stable Funding Ratio and Bank Net Interest Margins

42 Pages Posted: 30 May 2014

Date Written: June 18, 2013

Abstract

The Net Stable Funding Ratio (NSFR) is a new Basel III liquidity requirement designed to limit funding risk arising from maturity mismatches between bank assets and liabilities. This study explains the NSFR and estimates this ratio for banks in 15 countries. Banks below the ratio need to increase stable sources of funding and to reduce assets requiring funding. The most cost-effective strategies to meet the NSFR are to increase holdings of higher-rated securities and to extend the maturity of wholesale funding. These changes reduce net interest margins by 70 to 88 basis points on average, or around 40% of their year-end 2009 values. Universal banks with diversified funding sources and high trading assets are penalized most by the NSFR.

Keywords: banks, funding risk, liquidity, regulation, Basel III, net interest margins

JEL Classification: G21, G28, E51

Suggested Citation

King, Michael Robert, The Basel III Net Stable Funding Ratio and Bank Net Interest Margins (June 18, 2013). Journal of Banking and Finance, Vol. 37, No. 11, 2013, Available at SSRN: https://ssrn.com/abstract=2443168

Michael Robert King (Contact Author)

Gustavson School Of Business ( email )

University of Victoria
Business & Economics Building, Room 246
Victoria, British Columbia V8W 2Y2
Canada
250-721-6425 (Phone)

HOME PAGE: http://https://www.uvic.ca/gustavson/faculty/faculty/faculty/current/kingm.php

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