Why Use Us for Liquidity Monitoring and Testing
Liquidity must be managed on many fronts: Liquidity Measurement and Reporting; Ongoing Sources and Uses of Funds Analyses; Contingency Funding Plan scenarios and Early Warning Triggers; and Liquidity Stress Testing.
We have experience in all these areas, and have built Liquidity programs from scratch, and have also fixed Liquidity programs that were found to be deficient and were the subject of Enforcement Actions.
Liquidity Liquidity Definition and Management
Liquidity is a measure of the cash and other liquid assets that an institution has available to meet short-term financial obligations. Liquidity is a rated component in a Regulatory Risk Examination and is a crucial element of short- and long-term bank operations and viability.
An analysis of Liquidity requires ongoing reviews of Sources and Uses of Funds, such as:
- funds needed for loans that will be closing in the near term;
- funds needed for ongoing operations;
- incoming funds from maturing investments;
- incoming funds from deposit growth;
- borrowings needed for any shortfalls.
Liquidity Analysis should also include measurement of various Liquidity ratios, policy parameters that those ratios should be within, and action plans when a ratio falls outside of policy parameters. Liquidity must be managed on an ongoing basis, with Liquidity reporting to the Asset Liability Committee (ALCO) and the Board on a quarterly or even monthly basis.
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Liquidity Contingency Funding Plan and Stress Testing
Institutions are required to have a Contingency Funding Plan (CFP), which considers scenarios in which access to funds is impaired, and the CFP must show alternative sources of funds and explain how the institution would obtain funds from other sources in order to address its loan pipeline and other necessary uses of funds.
An institution must also conduct Liquidity Stress Testing, including the use of early warning triggers and CFP scenarios, and guidelines for when a Liquidity Action Plan might need to be activated. Liquidity is a crucial component of operations and Liquidity Risk must be managed properly at all times.