Every financial institution’s liquidity policy should have a contingency plan that addresses alternate funding. A contingency funding plan should outline practical and realistic funding alternatives that may be utilized without a delay in availability. Access to these funding sources are to be actively managed, monitored, and periodically tested.

Success starts with sound liquidity planning consisting of a board-approved framework which includes policies, procedures, projection reports, and action plans. Primary tools for measuring and monitoring liquidity risk are:

  • Cash flow projections – estimated cash inflows and outflows for each significant balance sheet account over specified time horizons
  • Diversified funding sources – components of funding sources should be identified as short, medium and long term considering access to market sources and a contingent federal liquidity provider
  • Stress testing – identify stress circumstances, stages and severity levels ranging from moderate, severe, to crisis level as well as specific risks in the financial institution’s local area
  • Cushion of liquid assets- highly liquid assets such as short-term deposits and treasury securities at levels adequate to avoid service disruptions and external funding arrangements
  • Formal well developed contingency funding plan – comprehensive and sufficient to address potential adverse liquidity events and emergency cash flow needs addressing both the severity and potential duration of negative liquidity events and ability to meet shortfalls for each stress event

Based on the financial institution’s risk profile, early warning indicators and trigger points need to be established and monitored. Monitoring these metrics alert management to an impending event in a timely manner. In today’s rising interest rate environment, the potential effects on deposit mix and costs are key risk issues for a contingency plan. Economic growth increases loan demand and competition for funding sources. Customer expectations of higher returns pressure banks and credit unions to raise deposit rates.   Deposit mix has shifted toward non-maturity deposits. Consequently, NMD assumptions continue to be a very important factor of liquidity management.

As economic factors changes, your contingency funding plan needs to be updated to reflect anticipated challenges and best prepare for potential conditions across a range of scenarios. A good plan is not static, but is fluid and adapts with changes in market conditions.

To find out more about how RSM can assist you with your business needs, contact RSM’s management consulting professionals at 800.274.3978 or email us.