US proposes bank funding ratio to discourage 'volatile' short-term funding

WASHINGTON (REUTERS) - The top US banking regulator on Tuesday released its proposal for establishing a Net Stable Funding Ratio, a final piece in the puzzle to strengthen banks' liquidity and discourage market-disrupting volatility.

The ratio is intended to ensure liquidity over a one-year horizon, compared to the liquidity coverage ratio of 2014 that required banks to hold high-quality assets that could be readily converted into cash within 30 days. The proposal is in line with the international Basel III NSFR standard set in 2015, according to the FDIC.

The NSFR would apply to banks with US$250 billion or more in total consolidated assets or US$10 billion or more in foreign exposure. The Federal Reserve Board will release a modified version for bank holding companies with at least US$50 billion in assets, the FDIC said.

The "required stable funding amount", the denominator in the ratio and what will likely generate the most debate among banks and regulators, will rely on a set of standardized weightings including the carrying values of a bank's assets, the undrawn amounts of its commitments, and its derivatives exposure .

The FDIC also said it would measure the liquidity of banks'assets by credit quality, tenor, counterparty, market characteristics, encumbrance.