Economics • Banking & FinanceHard
What does the 'Net Stable Funding Ratio (NSFR)' under Basel III banking standards require financial institutions to maintain?
A. A minimum amount of stable funding relative to the liquidity profiles of assets over a one-year horizon✓ Correct Answer
B. A high-quality liquid asset buffer capable of meeting thirty-day cash outflows during systemic financial stress
C. A capital adequacy ratio exceeding fifteen percent comprising Tier-1 equity and perpetual bonds
D. An equal proportion of short-term inter-bank borrowings matched against long-term housing mortgage portfolios
💡 Solution & Explanation
The Net Stable Funding Ratio requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities over a one-year horizon, reducing funding risk. Distractors describe the Liquidity Coverage Ratio thirty-day stress buffer or standard capital adequacy ratios. This standard limits overreliance on volatile short-term wholesale funding for long-term lending operations. Both NSFR and LCR are core liquidity parameters introduced post-global financial crisis under Basel III guidelines.
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