MODEL CONTINGENCY FUNDING PLAN (for MHSI ALMPro Clients)

Transcription

1 You can also download this Policy (MS Word format) from our website MODEL CONTINGENCY FUNDING PLAN (for MHSI ALMPro Clients) NCUA Rule 12 C.F.R requires all federally-insured credit unions to formalize their liquidity and contingency funding plans. The regulation requires that credit unions with assets of less than $50 million to maintain a basic written policy that provides a credit union board-approved framework for managing liquidity and a list of contingent liquidity sources that can be employed under adverse circumstances. Credit unions with assets of more than $50 million are required to maintain a contingency funding plan that expands upon the written liquidity policy and is commensurate with the credit union s complexity, risk profile and scope of operations. Credit unions with assets of more than $250 million must also establish and document access to at least one contingent federal liquidity source. This Plan addresses contingency funding when the credit union experiences reductions to its liquidity position, either from causes unique to the credit union or systemic events which would limit its ability to maintain normal operations and service to members. It is intended to be used with other plans and policies which address liquidity risk, funding, and business continuity. The contents of this Plan are offered free of charge by Mark H. Smith, Inc. (MHSI) with no assurance or warranty as to their adequacy or suitability for any individual credit union. Credit unions using this model Plan should carefully review each aspect of the Plan and determine if the contents of that section are suitable, appropriate and reflect the intentions of the Board of Directors. In almost all cases, this model Plan will require modifications to make it fit the needs of a specific credit union. Additionally the contents of this sample plan have not been reviewed for legal or compliance issues. We strongly recommend that prior to adoption the proposed Plan be reviewed by the credit union s legal counsel for conformance to all legal and compliance issues. SECTION 1 ADOPTION This Plan was adopted and approved by the Board of Directors of the Credit Union as of. This Plan should be reviewed and approved at least annually by the Board of Directors and the ALCO. Page 1

2 SECTION 2 PLAN OBJECTIVE A. Primary Goal: The primary goal of the Contingency Funding Plan (CFP) is to provide an action plan framework for contingency funding when the credit union experiences a reduction to its liquidity position, either from causes unique to the credit union or systemic events, which would limit its ability to maintain normal operations and service to members. The CFP will set forth the framework to assess, measure, monitor, and respond to potential contingency funding needs. The Asset and Liability Committee (ALCO) will be designated to execute the CFP and communicate directly with the Board of Directors. [The Board may designate the CEO or itself to execute the CFP] B. Laws and Regulations: It is the intention of the Board of Directors that the activities of all employees, officers, and officials of the credit union will at all times be in accordance with all federal and/or state laws and regulations applicable to the credit union and its activities. C. Coordination of Policies and Plans: It is the intention of the Board of Directors that this Plan be implemented in a way in which will not conflict with the other stated goals, policies, and plans of the credit union. In the case of such conflicts, the chief executive officer (CEO) will arbitrate the issue until such time at the matter can be addressed by the Board of Directors and the conflicts are resolved. D. Exceptions to Plan: At times, exceptions to this Plan may occur in the operations of the credit union. If exceptions occur they should be brought to the timely attention of the Board of Directors who will resolve with them in an appropriate manner. Plan exceptions and their resolutions should be noted in the minutes of the board. SECTION 3 PLAN REQUIREMENTS A. Minimum Liquidity Balances: The credit union will maintain minimum liquidity balances and liquidity targets as identified in the Model Funding and Liquidity Risk Policy. Liquidity will be maintained in immediately available and highly liquid sources; such as cash, highly liquid securities, and available credit facilities expected to be available in a systemic stress event. B. Identifying Liquidity Stress Events: Liquidity stress events are unexpected situations or business conditions that may reduce the credit union s liquidity position and increase the risk that available funds will not be sufficient to meet operation needs, including funding asset originations or maturing liabilities. The CFP addresses low-probability, high-impact events. The Model Funding and Liquidity Risk Policy (Liquidity Policy) Guidelines (Section 7) provide identified measures and analysis that will be incorporated in this CFP. This includes forecasted cash flow analyses and stress testing. Stress testing will incorporate plausible stress events and evaluate those stress events under different levels of severity. Liquidity Policy guidelines identify Acceptable (Green), Caution (Yellow), and Requires Corrective Action (Red) categories for these measures and analyses. These measures and the associated categories will be utilized in this CFP as quantitative early warning indicators and triggers to identify stress events. These measures will be utilized in a liquidity matrix to monitor if the CFP needs to be activated. Other potential triggers monitored in the liquidity matrix are as follows: [The credit union should review the lists below and add or delete triggers based on the relevance to your credit union] Page 2

3 Credit Union specific triggers: 1. Deterioration of asset quality 2. Failure to renew key funding facilities 3. Material increase in member line draws 4. Significant reduction in principal and interest cash inflow patterns 5. Material increase in origination volume from plan 6. Operating losses 7. Unanticipated share and deposit withdrawals 8. Unanticipated loan demand 9. Deteriorating capital levels 10. Difficulty accessing longer-term funding 11. Concentration of CD maturities Systemic triggers: 1. Declining asset values 2. Fixed income securities market disruption or demand reduction 3. Large deposit outflows from insured deposits 4. Weakening economic indicators 5. Failure of a large financial institution Severity Levels and Responses The liquidity matrix will incorporate the Liquidity Policy guideline measures as well as monitoring of other identified triggers. The liquidity matrix will identify the severity of measures and other identified triggers as follows: Level Description Action Acceptable (Green) Stable liquidity condition No action required Caution (Yellow) Requires Corrective Action (Red) Elevated liquidity stress condition (temporary or long term) Severe liquidity stress condition (temporary or long term) Elevated monitoring of the liquidity position by the ALCO CFP Activated Levels of liquidity stability are categorized as Acceptable, Caution, and Requires Corrective Action. A Caution severity results in more frequent monitoring. A Requires Corrective Action severity results in the activation of the CFP. The liquidity matrix will also identify if the event is a temporary disruption or a longer term disruption. Liquidity measures will also be tested under various plausible stress event scenarios to assess the potential severity and the corresponding degree of the resolution. A resolution will be identified in this testing process for plausible stress event scenarios. Early Warning Indicator The liquidity matrix structure in conjunction with its associated reporting process and review is designed to identify a potential liquidity event before it becomes a crisis. The Caution category is utilized to potentially detect a liquidity crisis event and will prompt more frequent and specific monitoring. This process can act as an early warning indicator to address potential issues before they become a crisis if possible. C. Lines of Authority: In the case of a contingency funding event (as identified in the liquidity matrix), the credit union CEO will activate the CFP and immediately communicate this Page 3

4 action to the Board of Directors. The ALCO will proceed to execute the CFP and applicable contingency funding source(s) based on the contingency funding event. Roles, responsibilities, communications, and the lines of authority for the monitoring, assessment, and management of the CFP process are as follows: Board of Directors: The Board of Directors will retain the final authority and responsibility for the CFP as well as the following: 1. At least quarterly, the Board will a. Receive and review a summary analysis of the liquidity position including stress testing results. b. Receive and review the liquidity matrix that monitors the need to report more frequently, or activate the CFP. c. Review the stress testing of the credit union s liquidity position. 2. At least annually, the Board will a. Reapprove the CFP b. Receive a summary assessment of contingency funding sources, their availability, event triggers, the CFP, and the contingency funding tests. c. Receive a review of the stress testing scenarios. CEO: 1. Has the responsibility for the quarterly reporting of the liquidity matrix to the Board. 2. Has the responsibility for ensuring the CFP requirements are met. 3. Approves activation of the CFP if warranted following a review of the liquidity matrix. This will also include approval of the action plan for a given CFP activated stress event. 4. Has the responsibility of overseeing the ALCO in executing the CFP. ALCO: 1. Has the responsibility for quarterly updates and monitoring the liquidity matrix. 2. Be knowledgeable of external events that could impact the liquidity matrix. 3. Has the responsibility of performing quarterly liquidity stress scenario testing. 4. Has the responsibility to execute the CFP following CEO activation. 5. Evaluate stress events and recommend an action plan to the CEO. 6. Has the responsibility of managing the CFP upon its execution. This may include more frequent and in-depth liquidity analysis and forecasts to assess event developments as well as monitoring the effectiveness of the CFP. This also includes managing contingency funding sources. 7. Has the responsibility of annually reassessing the CFP and stress test scenarios. 8. Has the responsibility of annually testing CFP borrowing and other CFP facilities. 9. Has the responsibility of annually reassessing identified trigger events. 10. Has the responsibility of managing and categorizing assets that may be utilized when enacting the CFP (i.e. asset sale cash generation and pledge ability). [The ALCO accountabilities can be performed by the CEO or senior manager if the credit union does not have an ALCO] D. Contingent Funding Sources: Specific contingency funding sources are identified in this Plan. Conditions related to the use of these sources and when they would be used are also identified. Contingent funding options will be diverse across multiple funding sources, including no reliance on one entity. Borrowing facilities will be tested periodically, collateral monitored (where applicable), and all funding sources defined will be reviewed for availability. The following contingency funding sources table will be reviewed annually at a minimum to ensure availability and adequacy for identified potential contingency funding needs. Page 4

5 Contingency Funding Borrowing Facilities Facility CLF FRB Discount Window Description and Conditions of Use NCUA Facility, Indirect relation, Must meet criteria. Federal Reserve Bank, Collateral, Must meet criteria. Amount Circumstance of Utilization Temporary circumstances (Expand Temporary circumstances (Expand CCU Corporate CU circumstances (Expand FHLB Regional Federal Home Loan Bank circumstances (Expand Contingency Funding Non-borrowing Sources Source Description and Conditions of Use Amount Circumstance of Activation Investment Securities Sales Marketable securities (track market values, unencumbered, other conditions of use) circumstances (expand Deposit Listing Services Publish deposit rates for institutional deposits (service active and process functional) circumstances (expand Loan origination reduction Identify and rank specific loan categories circumstances (expand [The identified facilities and sources are provided as examples only. The facilities and sources identified are not meant to be comprehensive and credit unions need to identify and establish borrowing facilities and funding sources for their specific needs] [Descriptions and Conditions of Use should be specific in terms of periodically monitoring availability and amount sufficiency for use. Circumstances of Activation should identify the potential stress events when the funding source would be activated and utilized. The Description and Conditions of Use and Circumstance of Activation examples provided above are abbreviated and not comprehensive] [Credit unions may include noncore funding sources, but these should be limited to % of total share deposits and define how and when they would be used] Page 5

6 SECTION 4 PLAN ACTIVATION The following process establishes the need for CFP activation and establishes the steps following CFP activation and the engagement of the ALCO to execute the CFP. Activation Steps 1. The ALCO (can substitute with CEO or a senior manager) will prepare and monitor the liquidity matrix quarterly. 2. The CEO will report the liquidity matrix (or summary thereof) to the Board of Directors. 3. If an event trigger identifies a Caution level as an early warning indicator, more frequent analysis of the liquidity position may be required by the CEO and Board of Directors. This may also include additional stress case scenario forecasts. 4. If an event trigger identifies a Requires Corrective Action level, the CEO will activate the CFP which will authorize the ALCO to execute the CFP and will notify the Board of Directors immediately. 5. Once activated, the ALCO CFP execution will include the following: a. More frequent analysis of the liquidity position. This may also include additional stress case scenario forecasts (to include degradation of liquidity sources). b. An assessment of the contingency funding sources table to determine the applicable source(s) to utilize (to include an immediate assessment of all available sources). c. Applicable contingency funding source activation. d. Development of an action plan to be approved by the CEO and reported to the Board. e. More frequent status updates and analysis by the ALCO to the Board of Directors to facilitate decision making. f. The ALCO will review the effectiveness of the action plan and report to the Board. g. The ALCO will recommend modifications to the action plan if required. h. The CFP activation will continue until the crisis has been resolved. SECTION 5 PLAN TESTING AND REVIEW The credit union will review and test the CFP annually at a minimum. The review and test will include the following: 1. A review of the effectiveness of identifying potential liquidity issues (early warning signals and triggers). 2. Adequacy of the CFP process to address a liquidity crisis. 3. A review of the contingency funding sources. a. Adequacy of amounts available. b. Conditions of use. c. Availability and functionality. d. Circumstances of activation. e. Evaluation of the reliability of each source under times of stress. 4. Test of undrawn lines of credit, external (non-core) deposit gathering sources, and other funding sources such as loan sales where possible and applicable. The Board will review a summary of the review and test with applicable findings and recommendations noted. Page 6