Basel III and the Net Stable Funding Ratio

Abstract

We validate the new Basel liquidity standards as encapsulated by the net stable funding ratio in a quantitative manner. In this regard, we consider the dynamics of inverse net stable funding ratio as a measure to quantify the bank’s prospects for a stable funding over a period of a year. In essence, this justifies how Basel III liquidity standards can be effectively implemented in mitigating liquidity problems. We also discuss various classes of available stable funding and required stable funding. Furthermore, we discuss an optimal control problem for a continuous-time inverse net stable funding ratio. In particular, we make optimal choices for the inverse net stable funding targets in order to formulate its cost. This is normally done by obtaining analytic solution of the value function. Finally, we provide a numerical example for the dynamics of the inverse net stable funding ratio to identify trends in which banks behavior convey forward looking information on long-term market liquidity developments.