Commercial bank NSFR adjustment and risk: Evidence from China

The net stable funding ratio (NSFR) is a critical monitoring indicator of bank liquidity risk introduced under the Basel III accord in 2009. This study used the partial adjustment model to analyze the NSFR adjustment behavior of Chinese commercial banks, leading to the following four findings. First, banks have been undertaking active liquidity adjustment while exceeding global and Chinese minimum standards. Second, the NSFR’s target level and adjustment speed are significantly higher than those of foreign banks. Third, the target NSFR gap is essential to the NSFR’s positive adjustment. Fourth, a higher target level and steady adjustment speed help reduce loss from systemic risk. This paper suggests establishing three liquidity risk firewalls, providing an essential reference for understanding NSFR adjustment in Chinese commercial banks. The study also provides practical significance for policy-level assessments regarding the impact of implementing NSFR supervision and establishing liquidity risk firewalls. [Display omitted] •We investigate the NSFR levels of Chinese banks and their adjustment speed.•We gave three hypotheses about the excessively high NSFR of Chinese banks and conducted empirical tests.•We studied the risks that Chinese banks’ NSFR adjustments may bring to the banks themselves.•We provide policy recommendations to prevent NSFR adjustment risks and how to build a risk firewall.•Our research is of great value to bank liquidity risk supervision.