Opening Statement on the Net Stable Funding Ratio Proposed Rule by Governor Daniel K. Tarullo

The financial crisis, which at least in the first instance was a liquidity crisis, drew attention to the need for quantitative liquidity regulation, which had been essentially non-existent. The proposed Net Stable Funding Ratio (NSFR) has been developed as a complement to the Liquidity Coverage Ratio (LCR), which we have already adopted and is now applicable to large U.S. banking organizations.

The LCR's thirty-day scope addresses the most immediate and acute liquidity problems that large firms could encounter in a period of stress. The NSFR requires these firms to maintain a stable funding profile over a one-year time horizon, thereby mitigating the potential effects of a firm's loss of funding and creating strong incentives for firms to extend the maturity of their funding arrangements. In addition, because of the impact that a withdrawal of funding from the customers of large firms can have on the financial system during periods of stress, the proposal requires more stable funding for short-term loans to other financial firms. 

As with all liquidity regulation, the proposal must require firms to maintain sustainable funding profiles and to avoid inappropriate reliance on central bank liquidity access. At the same time it should not incentivize firms to horde liquidity in periods of stress, rather than to use it to keep the financial system operating. I look forward to comments from the public both on how successfully the proposal balances these objectives and on what other regulatory and supervisory measures might help achieve these regulatory aims.