On May 3, 2016, federal banking regulators proposed a net stable funding ratio (NSFR) rule, which would require that large banks maintain a minimum level of stable funding relative to the liquidity of their assets, derivatives, and commitments. The rule would establish a quantitative metric to establish the covered company's funding profile, and would primarily be applicable to bank holding companies with more than $250 billion in consolidated assets. The proposal also invites comments on a modified form of the rule, which would be applicable to holding companies with over $50 billion in assets. Banks with less than $50 billion in consolidated assets would be exempt.

The rule is intended to increase financial stability and strengthen the resilience of large banks by reducing the risk that disruptions in funding will materially reduce liquidity in a particular bank. Regulators believe that limiting liquidity concerns in the largest banks will reduce liquidity risk in the banking system as a whole. The rule supplements the liquidity coverage ratio rule, which requires banks to have a minimum amount of high quality liquid assets (see Legal Update, Bank Liquidity and Supplementary Leverage Rules Adopted).

Specifically, covered entities would be required to calculate a weighted measure of the stability of its equity and liabilities over a one-year horizon to establish an available stable funding amount (ASF). Covered entities would also be required to calculate a minimum level of stable funding (required stable funding or RSF), calculated based on the liquidity characteristics of its assets, derivatives exposures, and commitments over the same period of time. The net stable funding ratio, or NSFR, would be the ratio of these two numbers, and under the proposal, covered entities would be required to maintain a minimum NSFR of 1.0 (ASF would have to be greater than or equal to RSF). Covered entities that did not maintain the requisite NSFR would be subject to regulatory measures that would improve their liquidity and resilience, also outlined in the proposal.

The proposal was issued jointly by the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency and comments must be received by August 5, 2016.