Module: | MODULE B: RISK MANAGEMENT
Q468: Consider the following statements regarding the core framework of the Net Stable Funding Ratio (NSFR):
1. The NSFR is designed to promote structural resilience by requiring banks to maintain a stable funding profile in relation to their off-balance sheet activities over a one-year horizon.
2. The regulatory standard dictates that the ratio of the Available Amount of Stable Funding to the Required Amount of Stable Funding must be strictly less than 100 percent to ensure profitability.
3. The NSFR limits over-reliance on short-term wholesale funding, thereby encouraging better assessment of funding risk across all on-balance and off-balance sheet items.
Which of the statements given above is/are correct?
2. The regulatory standard dictates that the ratio of the Available Amount of Stable Funding to the Required Amount of Stable Funding must be strictly less than 100 percent to ensure profitability.
3. The NSFR limits over-reliance on short-term wholesale funding, thereby encouraging better assessment of funding risk across all on-balance and off-balance sheet items.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The fundamental objective of the Net Stable Funding Ratio (NSFR) is to promote long-term structural resilience.
It mandates that banks maintain a stable funding profile relative to the composition of their assets and off-balance sheet activities over a continuous one-year horizon.
Statement 2 is incorrect: The regulatory requirement is the exact opposite.
The formula dictates that the Available Amount of Stable Funding divided by the Required Amount of Stable Funding must be equal to or greater than 100 percent.
It has no direct relationship with enforcing profitability; it is strictly a liquidity risk mitigation standard.
Statement 3 is correct: By mandating a 100 percent minimum ratio, the NSFR directly penalizes and limits over-reliance on volatile short-term wholesale funding, forcing banks to adopt a more rigorous assessment of funding risks across all operations.
It mandates that banks maintain a stable funding profile relative to the composition of their assets and off-balance sheet activities over a continuous one-year horizon.
Statement 2 is incorrect: The regulatory requirement is the exact opposite.
The formula dictates that the Available Amount of Stable Funding divided by the Required Amount of Stable Funding must be equal to or greater than 100 percent.
It has no direct relationship with enforcing profitability; it is strictly a liquidity risk mitigation standard.
Statement 3 is correct: By mandating a 100 percent minimum ratio, the NSFR directly penalizes and limits over-reliance on volatile short-term wholesale funding, forcing banks to adopt a more rigorous assessment of funding risks across all operations.