Chartered Financial Analyst (CFA) Practice Exam Level 2

How is Net Stable Funding calculated?

1. Available Stable Funding / Required Stable Funding

2. Expected Cash Outflows / Highly Liquid Assets

3. Cash Flow from Operations / Total Liabilities

4. Long-term Debt / Total Assets

The correct answer is: Available Stable Funding / Required Stable Funding

Net Stable Funding is calculated as the ratio of Available Stable Funding (ASF) to Required Stable Funding (RSF). This metric is essential in assessing the stability of a financial institution's funding sources over a one-year horizon, particularly in the context of liquidity management. The Available Stable Funding comprises the portion of a bank's funding that is expected to remain stable over an extended period, while Required Stable Funding represents the amount of funding needed to support its assets over that same timeframe. By using the formula of ASF over RSF, stakeholders can evaluate whether a financial institution has a sufficient amount of stable funding relative to its funding requirements. A ratio greater than one indicates that the institution has more stable funding than needed, which is a sign of good financial health and resilience against potential liquidity shocks. In contrast, a ratio below one may indicate that the institution is heavily reliant on short-term funding sources, which can expose it to liquidity risk. Therefore, the correct choice illustrates the proper calculation method and reinforces the importance of stable funding in maintaining the financial stability of institutions.