======Net Stable Funding Ratio (NSFR)======
The [[Net Stable Funding Ratio]] (NSFR) is a crucial measure of a bank's long-term health and stability. Think of it as a one-year stress test for a bank's funding. It ensures that a bank has enough stable, reliable funding to cover its needs over a 12-month period, even during a severe crisis. Introduced as part of the [[Basel III]] international regulatory framework after the [[2008 Financial Crisis]], the NSFR was designed to fix a critical weakness: banks funding long-term [[assets]] (like 30-year mortgages) with dangerously short-term [[liabilities]] (like overnight loans from other banks). When panic strikes, this short-term funding can vanish in an instant, leaving the bank insolvent. The NSFR forces banks to match the maturity of their assets and liabilities more prudently. For investors, it's a powerful indicator of a bank’s risk appetite and its ability to weather a prolonged storm, separating the durably-funded institutions from those built on a house of cards.
===== Why Should a Value Investor Care? =====
For a [[value investing]] practitioner, the NSFR is more than just banking jargon; it’s a window into the soul of a bank’s management. Value investors prize durability, conservatism, and a wide [[margin of safety]]. A bank with a consistently high NSFR is demonstrating these exact qualities. It tells you the bank isn't chasing risky, short-term profits by taking on excessive funding risk. Instead, it's building its business on a solid foundation of stable funding sources like loyal customer deposits. While metrics like [[price-to-book ratio]] or dividend yield might tell you if a bank stock is //cheap//, the NSFR helps you determine if it's //safe//. A low or barely compliant NSFR can be a major red flag, signaling a fragile institution that might not survive the next economic downturn—precisely the kind of "value trap" a wise investor seeks to avoid.
===== Breaking Down the Formula =====
==== The Simple Idea ====
At its heart, the NSFR is a simple ratio. The rule, set by regulators like the [[Bank for International Settlements]], is that this ratio must be at least 100%.
  * //NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF) ≥ 100%//
In plain English, the stable funding a bank //has// must be greater than or equal to the stable funding it //needs//. Let's look under the hood.
==== What is Available Stable Funding (ASF)? ====
[[Available Stable Funding]] (ASF) is the "good stuff" on a bank's balance sheet—the money that's likely to stick around in a crisis. Regulators assign different stability "weights" to different types of funding. The more reliable the source, the higher its contribution to the ASF.
  * **Most Stable (100% weight):** Things like the bank's own [[capital]] and long-term debt (over one year), and crucially, insured [[retail deposits]] from ordinary customers like you and me. These are considered the bedrock of a bank's funding.
  * **Less Stable (e.g., 50% weight):** Certain types of less-stable customer deposits or funding from corporations.
  * **Not Stable (0% weight):** Very short-term borrowing from other financial institutions, often called [[wholesale funding]]. This money can disappear overnight during a panic.
==== What is Required Stable Funding (RSF)? ====
[[Required Stable Funding]] (RSF) is a measure of how much stable funding a bank //needs//, based on the riskiness and illiquidity of its assets. The less liquid an asset is (i.e., the harder it is to sell quickly without a big loss), the more stable funding it requires.
  * **Low Requirement (e.g., 0-5% weight):** Ultra-safe and liquid assets like cash and central bank reserves require very little stable funding.
  * **Moderate Requirement (e.g., 50-65% weight):** High-quality corporate bonds or residential mortgages that are relatively easy to sell.
  * **High Requirement (100% weight):** Illiquid assets like loans to small businesses, commercial real estate, or complex securities that are hard to sell in a stressed market.
===== The NSFR in Action: A Tale of Two Banks =====
Imagine two banks, "Prudent Bank" and "Risky Bank," both having $100 million in loans (their assets).
  * **Prudent Bank** funds its $100 million in loans primarily with $95 million in loyal customer deposits and $5 million of its own capital. Its ASF is very high. Since its loans are its main asset requiring funding, its RSF is determined by that $100 million. Its NSFR will be comfortably //above// 100%. When a crisis hits, its depositors are unlikely to flee, so the bank remains solid.
  * **Risky Bank** funds its $100 million in loans with only $20 million in customer deposits and a whopping $80 million in short-term wholesale funding from the money markets. Its ASF is dangerously low. Its NSFR will be //below// 100%. When the market panics, that $80 million in wholesale funding evaporates. Risky Bank is now in deep trouble and may fail.
===== The Bottom Line for Investors =====
The Net Stable Funding Ratio is a key health metric for any bank you consider investing in. It's the long-term counterpart to the [[Liquidity Coverage Ratio]] (LCR), which measures a bank's ability to survive a 30-day panic. Together, they provide a powerful picture of a bank's resilience.
When analyzing a bank, look for an NSFR comfortably above the 100% minimum. A higher ratio (e.g., 110% or 120%) suggests a more conservative and robust institution. It's a clear signal that management prioritizes long-term stability over short-term gains—a philosophy that aligns perfectly with the principles of value investing.