Despite a tough economy, the average person still
leaves a 15.2% tip at restaurants nationwide when
they eat out. When it comes to more expensive
eateries, generous tippers leave an average of
19.6%. Wherever you go to stuff your belly, tip freely
and tip often. After all, it not only stimulates the
economy, but it also makes people more dependent
on banks (hey, that cash has to go somewhere
eventually). In the meantime, we thought our
readers might like a few tips of their own during this period of
immense industry turmoil and uncertainty.
Tip #1 - The industry has changed drastically and liquidity risk
is a very big deal. Each day the news wires are filled with stories
about financial entities under significant stress. As a group,
bankers should focus additional energy on addressing
weaknesses in liquidity that could increase risk to their bank.
Tip #2 - Work to better understand what liquidity management
is really all about. To effectively manage liquidity, bankers need
to make sure it is embedded into the fabric of the organization. It
is an ongoing process focused on ensuring short term obligations
can be met at a reasonable cost, while simultaneously ensuring
capital is not strained. Keeping tabs on liquidity risk requires
banks to have good management information systems,
continually analyze liquidity needs under alternate scenarios,
diversify funding sources and have contingency plans in place to
ensure survival when unexpected consequences surface.
Tip #3 - Appreciate what liquidity risk is and make sure
everyone within the bank also understands it. Liquidity risk is an
inability to meet daily cash needs as a result of inadequate
liquidity capacity or flexibility. Banks should not only make sure
there are multiple pools of liquidity that are readily available (e.g.
PCBB, FHLB, FRB Discount Window, etc.), but of nearly equal
importance, staff should be trained how to respond in a liquidity
crisis. Truly understanding funding options in advance of any
issue maximizes flexibility.
Tip #4 - Develop key strategy elements and include them as
part of the overall liquidity management process. To do that,
bankers should make sure they have an agreed upon strategy for
handling daily liquidity management, communicated that strategy
throughout the bank and approved the strategy at the Board
level. In addition, banks should make sure they have
policies/procedures that relate to the liquidity strategy and that
they have consistent ways to test and monitor things.
Tip #5 - Strengthen reporting and make sure any yellow or red
flags that surface are quickly acted upon. One critical component
in this regard is the need to ensure both management and the
Board are regularly informed about liquidity. If the bank's liquidity
situation changes in any material way, it is management's
responsibility to immediately inform the Board. In addition, while
having quality reports is a key component of any good liquidity
management program, these must in turn be supported by
regular monitoring and review of limits (on the size of each
liquidity pool) and over various time horizons.
As has been seen repeatedly (over the past few weeks in
particular), markets can be disrupted and those disruptions can
be extreme. When that happens, liquidity can literally dry up
overnight (even for very sophisticated and very well recognized
companies). As such, now more than ever it is important for
banks to constantly measure, monitor, control, report, test and
retest liquidity. Controlling liquidity risk to some may seem like a
simple and straightforward task. In reality, it is one of the most
difficult to manage. Maintaining adequate liquidity and planning
for contingencies these days is an ongoing and complex process.
While tipping at restaurants is optional and dependent on
service, ensuring your bank has a practical and realistic liquidity
plan is not. Bankers should take another look at their liquidity
plan to be sure it still works, even when access to funding and
capital is reduced. Bankers should also take heart this final tip as
they prepare for the next regulatory examination visit -
examiners will not only evaluate a bank's ability to maintain
access to liquidity in a "normalized" situation, but also when
market stresses occur. Be prepared and be safe.