This lesson examines the bank’s sources of funding and its ability to meet its liquidity needs .

7.1 Sources of Bank Funding
Banks have a range of funding sources:

  • Customer Deposits: The most stable and cost-effective source of funding. Funding stability is a key analytical focus .

  • Short-Term Wholesale Funding: Commercial paper, repurchase agreements (repos), and interbank borrowing .

  • Long-Term Wholesale Funding: Bonds and subordinated debt.

  • Shareholders’ Equity: The most stable, but most expensive, source of funding.

7.2 Funding Stability
Analysts assess the stability of a bank’s funding base. A stable funding base reduces liquidity risk. Key questions are:

  • Is the deposit base stable, or is it subject to withdrawal?

  • How dependent is the bank on short-term wholesale funding?

  • Are there contingency funding plans in place? 

7.3 Key Liquidity Metrics
Key liquidity metrics include:

  • Liquidity Coverage Ratio (LCR): A short-term liquidity metric.

  • Net Stable Funding Ratio (NSFR): A long-term stability metric.

  • Loan-to-Deposit Ratio: A measure of funding reliance .

7.4 Basel III Liquidity Requirements
The implementation of Basel III has introduced new, stricter liquidity requirements for banks, including the LCR and NSFR .

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