Board of Governors of the Federal Reserve System

As a measure of the medium-term funding health of banks, the net stable funding ratio, or NSFR, final rule will complement and reinforce the liquidity coverage ratio (LCR) rule, which addresses the risk of short-term cash outflows in an acute period of stress. We have tailored the scope of the NSFR final rule in light of the Economic Growth, Regulatory Reform, and Consumer Protection Act to align with the tailored scope of application in the LCR rule because the two requirements are designed to work together. Specifically, the final rule tailors the stringency of the requirements based on a bank's risk profile, with the most stringent requirements for the largest and most complex banks and less stringent requirements for firms with less risk.

The NSFR final rule departs from the proposal in an important way given recent dislocations in the U.S. Treasury market and U.S. Treasury repo market. Specifically, given the importance of these markets functioning properly, the final rule reduces the funding requirements on U.S. Treasuries and on certain secured loans backed by U.S. Treasuries. The final rule imposes the same required stable funding measure on both Treasuries and central bank reserves because it is important, particularly in times of stress, that there is no regulatory or supervisory preference that would encourage banks to maintain central bank reserves instead of Treasury securities to satisfy regulatory requirements or supervisory expectations.

While the final rule differs from the proposal and Basel standard in this respect, this aspect of the final rule is aligned with the NSFR framework that applies in the European Union and would promote financial stability and intermediation in the U.S. Treasury market.