In this age of uncertainty, every bank should have a liquidity contingency plan. Let's just assume that one day, for whatever reason (financial problems, bad press, market dislocation, etc.), your bank cannot access the brokered CD market for a period of 6 months. What would you do? Hopefully, you have a written emergency liquidity plan. A good plan (and current bank operations) should encompass the following elements:
1) Ability to sell loans - the tested ability to sell a variety of loans is almost mandatory in this market. Knowing the steps involved in a sale, the documentation and due diligence requirements can assist in a sale and allow your bank to bring capital ratios back in line and provide liquidity. For that matter, banks should consider taking their largest exposures and selling small pieces of the loan now to other banks. In this manner, a troubled bank can quickly raise funds by selling the remaining exposure to those banks that already hold participations. This will cut execution time by 75%.
2) Multiple Fed Funds lines - (at least 3 and hopefully 5+ if you are over $500mm) lines are recommended from a variety of entities. East Coast, Mid-west and West Coast providers should all be included to handle a variety of time zones and potential disasters. In addition, your Fed Funds should be from local banks (get reciprocal lines), bankers' banks and national banks to give you the broadest coverage possible.
3) Repo agreements - Those brokers that help you with your bonds should also provide you with liquidity using loans and securities as collateral. If your credit becomes a question, having collateral and repurchase agreement lines can help.
4) FHLB â€" Know and articulate the ins and outs of working with their blanket pledge if you have one. If you need funds, you don't want to waste a day learning about how to get a waiver or approval to pledge other those encumbered assets. In addition, make sure all of management understands and tracks your borrowing capacity through the FHLB system.
5) Other sources - As much as we hate to promote our competition, being able to use CDARs, Quickrate, excess deposit insurance and other diverse potential funding sources can help in a crisis.
6) Canned retail promotional program - If you must raise funds quickly, have local newspaper ads, e-mailings and postcards ready to go to current customers with a short-term CD promotion. Customers will take the time to understand your situation more than others and are good sources of emergency funds. In addition, be prepared to use the internet and advertise on major search engines to increase your reach.
7) Public relations - Have a pre-planned, board approved, public relations campaign ready to go. The goal is to have this out within 2 hours of crises. The plan should contain a fill in the blanks press release ready and the ability to access the wire services, local papers and community groups in order to help calm fears by getting your side of the story out. Northern Rock and Bear Sterns are two entities that could have benefited by a quick response; they didn't and hysteria took over.
8) Pre-planned scenarios - Bird flu, your CEO led away in handcuffs, a dirty bomb, hurricane or any other potential scenario that has a higher probability of occurrence should be thought out now and planned for in terms of liquidity. Make sure you have the right staff, network access, contact numbers and other logistical issues figured out now, as opposed to when you are in crisis mode.