Module: | MODULE B: RISK MANAGEMENT
Q442: Consider the following statements regarding the Net Stable Funding Ratio (NSFR) mechanics under the Basel III framework:
1. The Net Stable Funding Ratio requires banks to maintain a stable funding profile in relation to their assets and off-balance sheet activities over a continuous 1-year horizon.
2. In the Net Stable Funding Ratio formula, regulatory capital and long-term stable retail deposits are assigned very high Available Stable Funding factors.
3. Non-Performing Assets are considered highly liquid due to collateral backing, and therefore attract a very low Required Stable Funding factor.
Which of the statements given above is/are correct?
2. In the Net Stable Funding Ratio formula, regulatory capital and long-term stable retail deposits are assigned very high Available Stable Funding factors.
3. Non-Performing Assets are considered highly liquid due to collateral backing, and therefore attract a very low Required Stable Funding factor.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Net Stable Funding Ratio (NSFR) is designed to ensure banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities over a structural 1-year horizon, mitigating the risk of future funding stress.
Statement 2 is correct: The NSFR numerator is Available Stable Funding (ASF). Highly reliable funding sources, such as Tier 1 regulatory capital and long-term stable retail deposits, are assigned extremely high ASF factors (up to 100% and 90% respectively) to reflect their stability.
Statement 3 is incorrect: Non-Performing Assets (NPAs) are not considered liquid.
Under Basel guidelines, defaulted loans are highly illiquid and therefore attract a very high Required Stable Funding (RSF) factor (typically 100%). This penalizes the bank by demanding that these bad assets be fully funded by permanent, stable liabilities.
Statement 2 is correct: The NSFR numerator is Available Stable Funding (ASF). Highly reliable funding sources, such as Tier 1 regulatory capital and long-term stable retail deposits, are assigned extremely high ASF factors (up to 100% and 90% respectively) to reflect their stability.
Statement 3 is incorrect: Non-Performing Assets (NPAs) are not considered liquid.
Under Basel guidelines, defaulted loans are highly illiquid and therefore attract a very high Required Stable Funding (RSF) factor (typically 100%). This penalizes the bank by demanding that these bad assets be fully funded by permanent, stable liabilities.