A Macroprudential Stable Funding Requirement and Monetary Policy in a Small Open Economy

The Basel III net stable funding requirement, scheduled for adoption in 2018, requires
banks to use a minimum share of long-term wholesale funding and deposits to fund their
assets. A similar regulation has been in place in New Zealand since 2010. This paper
introduces the stable funding requirement (SFR) into a DSGE model featuring a banking
sector with richly-specified liabilities, and estimates the model for New Zealand. We then
evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate
SFR does not materially affect the transmission of most structural shocks to the
real economy and hence has little effect on the optimised monetary policy rules.
However, a higher steady-state SFR level amplifies the effects of bank funding shocks,
adding to macroeconomic volatility and worsening monetary policy trade-offs conditional
on these shocks. We find that this volatility can be moderated if optimal monetary or
prudential policy responds to credit growth.