What is the objective of the net stable funding ratio (NSFR)?

• A. It requires banks to maintain a stable funding profile over a one-year horizon to reduce longer-term funding risk
• B. It measures short-term liquidity over 30 days
• C. It sets capital requirements based on risk-weighted assets
• D. It enforces currency pegs in international markets

Answer: (A)

NSFR is about funding stability over a long horizon. It aims to ensure banks finance their activities with sources that remain stable for about a year, so they’re less vulnerable to shifts in funding markets or sudden withdrawals. By comparing available stable funding to the required stable funding for their assets and operations over the year, banks are discouraged from relying too much on short-term, volatile funding. This helps reduce longer-term funding risk and promotes resilience during funding stress. It’s not about short-term liquidity (that’s the 30-day focus of the LCR), nor about capital requirements based on risk-weighted assets, nor about enforcing currency pegs.