The Basel III Net Stable Funding Ratio and Bank Net Interest Margins
42 Pages Posted: 30 May 2014
Date Written: June 18, 2013
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: Suggested Citation