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

• A. To increase short-term profits
• B. To reduce funding risk by ensuring stable funding over a year
• C. To shorten the maturity of assets
• D. To maximize liquidity risk

Answer: (B)

The NSFR is all about funding stability over a one-year horizon. It checks whether a bank has enough stable funding to support its assets and activities for a year, reducing the risk that the bank suddenly loses access to funding. In practice, banks compare available stable funding (capital, long-term deposits, and other funding expected to remain reliable for a year or more) with the required stable funding (funding needed for the liquidity characteristics and maturities of assets and off-balance-sheet exposures). The goal is to keep the NSFR at or above a safe level, promoting resilience against funding shocks. This focus on long-term, reliable funding means it’s not about chasing short-term profits, shortening asset maturities, or maximizing liquidity risk.