that each bank owns liquid resources to such an amount that short-term cash obligations arefulfilled even under a severe stress.The ratio requires banks hold enough liquid assets to offset the sum of all cash outflowsexpected over the next 30 days:Stock of High-Quality Liquid Assets > = 100%Net Cash Outflows over a 30-day PeriodLiquid assets are considered in terms of market value,to which standardized haircuts are applied dependingon type of asset and grade of liquidity. Net cash outflows are calculated by aggregating the bank’s assetsand liabilities under standardized categories and applying to each of them standardized coefficientsreflecting predefined stress assumptions.For example,a 75% factor applied to unsecured wholesale fundingin the denominator of the ratio entails an assumption that 75% of the currently outstanding amount willrun off within the next 30 days.•Net Stable Funding Ratio: looks at a medium-term horizon and focuses on the structuralbalance between maturities of a bank’s assets and liabilities. It is aimed at preventing banksfrom exposing themselves to extreme maturity transformation risks by funding medium andlong-term assets with very short-term liabilities. It was this practice that generated a massiverisk in 2007, which turned into a systemic liquidity shortage when major short-term liquiditychannels (especially those linked to securitized products) suddenly dried up.
8Basel III: What’s New?Business and Technological ChallengesSeptember 17, 2010The NSFR requires banks to have enough funding to last at least one year to compensate forall cash needs expected to occur beyond the same deadline:Available Amount of Stable Funding >= 100%Required Amount of Stable FundingAvailable Amount of Stable Funding is made up by cash, equity and liabilities which areexpected to remain with the bank for at least one year, either because they have a longercontractual maturity,or because they can be considered “sticky”even if their contractual maturityfalls within that year (as is the case,for instance,for a share of retail deposits).Required Amountof Stable Funding is the amount of assets that are not expected to be reimbursed for at leastone year (and therefore need to be funded for at least this period) and cash outflows expectedto occur beyond one year as a result of contingent liabilities.As well the LCR,the NSFR is calculated by aggregating a bank’s assets and liabilities (including contingentliabilities) into standardized categories and applying a set of coefficients reflecting standard scenarioassumptions regarding, for instance, the “stickiness”of the bank’s deposit base.No favourable treatment is envisaged for the following instruments,for which banks must therefore have100% Stable Funding:-Securitizable assets.