Initial Considerations regarding a Macro-Prudential Instrument based on the Net Stable Funding Ratio

The financial crisis led to a broad consensus among policy-makers and regulators that macro-prudential frameworks, in addition to micro-prudential policy, must be part of the solution to ensure the resilience of the financial system. The counter-cyclical capital buffer represents the first step in this direction taken by the Basel Committee on Banking Supervision. Regarding liquidity issues, two micro-prudential standards have been designed. The delegated act implementing the liquidity coverage ratio (LCR) at the European level has recently been adopted by the European Commission and the net stable funding ratio (NSFR) standard has just been finalised by the Basel Committee on Banking Supervision and was published on 31 October. After implementing these new standards, it will be necessary to monitor their impact on banks’ behaviour, market liquidity, monetary policy and financial stability before considering introducing any additional instruments. At this stage, the need for a liquidity-based macro-prudential tool is in the early stages of identification and discussion. Therefore, this special feature aims to provide some initial technical considerations regarding the macro-prudential use of the NSFR. The discussion considers two broad perspectives. The first is the need for a counter-cyclical NSFR to complement the counter-cyclical capital buffer. While capital and liquidity standards pursue different objectives, the two can also be used in conjunction depending on the specific risk to financial stability being targeted. The second perspective regards the use of the NSFR as a stand-alone macro-prudential tool, together with its potential trigger mechanism and its use in the current low yield environment. JEL Classification: G00