The net stable funding ratio is available stable funding divided by required stable funding, over a one-year horizon, and it must also be at least 100%.
How is the net stable funding ratio calculated?
Available stable funding weights each liability and capital item by how likely it is to stay for a year. Regulatory capital and liabilities with a residual maturity of a year or more count in full. Stable retail deposits count at 95% and less stable retail at 90%. Operational deposits and wholesale funding from non-financial corporates with a residual maturity under a year count at 50%. Funding from financial institutions with a residual maturity under six months counts at zero, and that's the number that does the work.
Required stable funding weights each asset by how hard it would be to monetise. Cash and central bank reserves need none. Level 1 securities need 5%. Level 2A needs 15% and Level 2B needs 50%. Residential mortgages that qualify for favourable risk weighting need 65%. Other performing loans with a residual maturity of a year or more need 85%. Anything else needs 100%, and undrawn committed facilities need 5% of the undrawn amount.
Applied to Chesapeake Union, available stable funding totals $31,400 million and required stable funding totals $32,425 million, so the ratio is 96.8389%. The bank is short by $1,025 million. It's a small gap, and it still has to be closed.
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What does the NSFR tell you about a bank?
Both of the points that follow are analytical.
The shortfall has a price. Terming out $1,025 million of the bank's one-to-six-month borrowings past a year moves that funding from a 0% available-stable-funding factor to 100%, which closes the gap. At a term premium of 75 basis points that costs $7.6875 million a year before tax, or $5.996250 million after tax at 22%. That's 1.3728% of the bank's net income. Before tax it's 0.8836% of pre-provision operating profit. The alternative is to shrink. Selling $1,205.882353 million of commercial and industrial loans, which carry an 85% factor, releases the same amount of required stable funding.
And the ratio explains a business model. A bank funded by sticky retail deposits and lending against houses passes comfortably. A bank funded by wholesale money under six months and lending to corporates fails, and the two Basel liquidity ratios are the only place in the published numbers where that structural difference is priced. The factors above are the Basel Committee's framework as national regulators have implemented it. The applicable factors, the definition of stable retail funding and the treatment of derivatives all need checking against the local rule for the bank you're reading. Verify against the relevant national implementation, the Reserve Bank of India's master direction or the US agencies' rule, for the reporting date.