BID® Daily Newsletter
Mar 25, 2010

BID® Daily Newsletter

Mar 25, 2010

CONTINGENCY FUNDING PLAN FOR LIQUIDITY


Google "CFP" and you will come up with options like Certified Financial Planner; Computers Freedom & Privacy; Conference for Food Protection; Conduit Flow Process and Call for Papers. While interesting, most bankers know CFP as "Contingency Funding Planning." We have covered this before, but given the new policy statement, we highlight items of interest that bankers should incorporate prior to the next exam.
As we have discussed, a CFP for bankers is really just a combination of policies, procedures and action plans in the event of unexpected liquidity issues. These are situations that arise that can increase liquidity risk. Regulatory documentation cites such examples as an inability to fund asset growth; an inability to renew or replace maturing funding liabilities; unexpected deposit withdrawals; off-balance-sheet commitment activity (unfunded commitment draws, etc.); a change in economic conditions or market perception; a change in market value or price volatility of assets; financial market dislocation; and disturbances in payment/settlement systems due to operational or local disasters. The goal of the CFP is to provide a plan that ensures liquidity sources are sufficient to fund normal operating requirements (without incurring undue expense or causing business disruptions).
Beyond just identifying CFP, banks also need to double-check to be sure processes are robust enough to address the latest policy. To do that, the CFP should be designed around a range of stressed environments, have clear lines of responsibility and articulate clear implementation and escalation procedures. Regulators expect banks to take into account events that are high-probability and low-impact, as well as low-probability and high-impact. Then, banks will need to assess variations around expected cashflow projections and make sure there is enough liquidity (both reserves and ways to capture additional funding) to survive the event.
At a minimum, regulators want banks to take into account many different factors when building the CFP. Among some of the most common: 1. Identify stress events that could have a significant impact on the bank's liquidity. These can include asset quality deterioration, changes in PCA capital categories, written agreements, CAMELS ratings downgrades, operating losses, declining equity price and negative press. 2. Take time to delineate various levels of stress severity that can occur so you can understand the different stages for each sort of event. Separate events into buckets to include temporary disruptions, intermediate & longer-term. Then, create early-warning indicators so you can assess funding needs at different points in a crisis and create action plans. 3. Identify external funding sources and uses to understand expected needs and available capacity during a given stress event. Pre-plan the loss of funding sources at various stages of a crisis and identify shortfalls that may occur as a result. In addition, banks need to understand their expected cash flows at various stages in crisis to better measure the bank's ability to internally fund operations. 4. Identify the crisis management team in advance and be sure training has occurred. That way, everyone knows what to do when the crisis hits. Be sure to create action plans for different levels of stress as well. Communication protocols are a key aspect of any crisis management and should include other team members, managers and the board of directors. A good CFP will increase communication requirements as the stress situation intensifies.
No matter the CFP you choose to incorporate or have already built into the fabric of your bank, it is important from time to time to revisit it to see what needs to be tightened up before the next examination team arrives - do that and at a minimum you will at least Certainly Feel Prepared.
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