Liquidity management and measurement has become a key point of regulatory emphasis. Make sure that all relevant parties within your institution are doing their part to ensure a sound liquidity process and the best possible result come exam time. Use this checklist to ensure your policies and procedures reflect the current guidance for liquidity.  

Board Responsibilities 
  • Each year your Board must review and approve the Liquidity Policy. 
  • Liquidity risk limits must be defined. 
  • Risk limits should reflect the material liquidity concerns of your institution and the board’s tolerance for those risks. Consider all unique customer, industry and account concentrations and associated risks. 
  • Your liquidity policy must clearly define roles and responsibilities with respect to monitoring and measuring liquidity risks.   
  • The liquidity policy must spell out all roles, responsibilities and procedures to be followed in the event of a liquidity crisis. 
  • The board should review the results of liquidity measurement and modelling as part of their normal meeting agenda. 
ALCO Responsibilities 
  • ALCO must monitor current and potential liquidity positions and deposit structure with an eye towards potentially volatile deposit balances and concentrations. 
  • ALCO must review liquidity ratios and cash flow forecasts for both normal and stress scenarios. 
  • ALCO should monitor deposit product pricing relative to local and national competitors. 
  • ALCO should create a process for measuring and monitoring liquidity, both static liquidity ratios and cash flow projections. 
  • Standard liquidity ratios that can used and are available in the UBPR include: 
  • Net Non-Core Funding Dependency 
  • Net Loans and Leases to Deposits 
  • Net Loans and Leases to Assets 
  • Short-Term Assets to Short-Term Liabilities 
  • Pledged Securities to Total Securities 
  • Brokered Deposits to Deposits 
  • Core Deposits to Total Assets 
  • Ensure you have adequate liquid assets and a diverse set of funding sources 
  • Cash flow projections should include both a “business as usual” as well as stress scenarios. 
Management Responsibilities 
  • Maintain an up to date list of primary and secondary funding sources 
  • Primary Sources 
  • Unencumbered liquid assets at market or liquidation value. 
  • Cash flows from existing book of business. 
  • Secondary or Contingent Sources 
  • Identification of loans or securities that can be used to secure additional borrowings. 
  • Include operational requirements, timing and physical location considerations for collateral. 
  • Established borrowing lines and collateral requirements.  
  • Provide reporting to ALCO for oversight of liquidity position. 
Liquidity monitoring should be a regular agenda item discussed at each meeting and include analysis. 
  • Periodic testing of borrowing lines 
Analyst Responsibilities 
  • Prepare liquidity measurement and reporting. 
  • Seek management and ALCO direction on modelling assumptions. 
  • Dynamic liquidity modelling including liquidity contingency stress testing. 
  • Model multiple liquidity scenarios, including 
  • Normal – Business as usual 
  • Moderate – Short Term 
  • Severe – Longer Term 
  • Work with ALCO and Management to create story lines to accompany each scenario. 
  • Local economic conditions 
  • Negative press 
  • Cyber breach/embezzlement/fraud 
  • National economic conditions 
  • Loss of key local employer 
  • Natural disaster 
  • Considerations 
  • Changing cash flows on existing book of business (call options, loan refinancing, etc.). 
  • Time deposit balance renewals or withdrawal. 
  • Early redemption of time deposits. 
  • Non-maturity deposit runoff (amount and timing). 
  • Accelerated funding of existing loan commitments. 
  • Future loan and deposit originations. 
  • Purchase and sales of bond holdings. 
  • Seasonal/Cyclical patterns. 
  • Regulatory limitation on deposit pricing or use of brokered funding. 
  • Curtailment of existing borrowing lines or additional collateral requirements should be considered. 
  • Produce cash flow forecast 
  • 12 month forecast of monthly cash flows is normally sufficient, unless specific concerns merit additional detail. 
  • Produce both periodic and cumulative net cash flows for future periods (Sources – Uses = Net Cash Flow). 
  • Alternatively, a coverage ratio (Sources divided by Uses) can be produces.  Ratios greater than one are considered adequate. 
  • Use of contingent sources to meet funding requirements should be clearly noted. 
NXTsoft hosted an instructional webinar on stress-testing your liquidity. It discusses the key elements including intrinsic cash flows, forecasting liquidity, and creating stress scenarios. You can view the recorded session
on-line by following this link.  
Bankers who want more information about the regulatory expectations for liquidity measurement and management should refer to the
FDIC – RMS Manual of Examination Policies – Liquidity and Funds Management which was used as a reference in the production of this article.