Liquidity Risk Basics Measuring and Managing Liquidity. Dad, What is Liquidity & Where Does it Come From?

Transcription

1 Liquidity Risk Basics Measuring and Managing Liquidity David Koch Chief Operating Officer FARIN & Associates, Inc Dad, What is Liquidity & Where Does it Come From? 2 1

2 Our Session Goals Liquidity Defined Regulatory Actions and Expectations Measurement systems What to measure Defining Triggers vs. Limits Measuring Liquidity Static vs. Dynamic Measures Net Stable Funding Ratio (NSFR) Liquidity Coverage Ratio (LCR) Liquidity Gap (Sources & Uses) Role of the Contingency Funding Plan (CFP) 3 Liquidity Defined Liquidity is: The ability to meet demands for cash at a reasonable cost. Liquidity Risk is: The risk that the institution may not have sufficient sources of cash to meet demands This is a scenario management issue! What are causes of changes in cash flows? ALM Process measures risks taken versus returns derived. Risk is to be MANAGED, not MITIGATED Liquidity Risk Regulatory Risk Asset/Liability Management Interest Rate Risk Credit Risk 4 2

3 Liquidity Risk Management Maintaining balance between available sources vs. needs while meeting capital planning goals for: Earnings Growth Capital Expected & potential scenarios Effective liquidity management helps produce maximum levels of earnings by investing excess funds While maintaining sufficient flows and sources of funds 5 Recent Regulatory Initiatives Fall 2012 Basel III Capital Proposal update proposed Final Liquidity rules to follow capital standards Functionally, 2010 Guidance is in place Interagency Policy Statement Funding and Liquidity Risk Management Issued 4/5/10 FRB, OCC, FDIC, OTS, NCUA Basel Committee issues International framework for liquidity risk measurement, standards, and monitoring AKA Basel III 6 3

4 Impact of 2010 Liquidity Guidance Liquidity Requirements More asset based liquidity (cash & securities) No guidance on how much is enough! Why: It is the only form of liquidity you can absolutely count on being there during a liquidity stress event Less reliance on wholesale funding for core growth What is your core funding plan? Where will you raise the funding needed to: Increase investments? Reduce non-core funding? 7 Impact of 2010 Liquidity Guidance Liquidity Requirements Cash Flow Based Liquidity Measurement How do we to integrate with IRR measurements Stress Tests Like Rate Shocks in IRR? What kinds of stress tests do we have to run? How frequently do we run them? 8 4

5 Historical Measures of Liquidity Measurements Based on Balance Sheet Levels Static Measurements Historically Based Examples: Short Term Assets / Short Term Liabilities Measures coverage of possible loss of funding with assets Volatile Funds Ratio Borrowings / Total Assets Measures the level of non-market funding sources used to build the balances sheet Total Loans / Total Assets Basic Surplus Ratio All Sources minus Uses within 30 days / Total Assets Target Ratio = 3-5% minimum 9 Static Measure Evolution Old approach Policy limits built around these measures Monitoring systems focused primarily on these measures. Primary weakness Measure liquidity at a point in time (old balance sheet) Fail to consider business plan or strategy May be outdated measures of liquidity Fail to consider potential stress events Current Trends Show Movement toward use as Triggers Green light, yellow light, red light Example Loan/Deposit Ratio Green L/D < 80% (normal heartbeat) Yellow L/D 80-90% (heart arrhythmia) Red L/D >90% (heart attack) Define actions taken in response to triggers 10 5

6 What are Triggers Definition Ratios or events being monitored to assess trends in performance Used as early warning indicators Allows for historical liquidity or call report ratios in policy without them becoming primary measures. 11 Common Trends Monitored Earnings ratios Credit agency downgrades Growth in volatile liabilities Negative publicity Declines in asset quality Loan offers not renewing Higher collateral requirements Loss or restricted correspondent credit lines Inability to secure longterm debt Loss of brokered CD buyers Loss of rate sensitive buyers Increase in early withdrawals Decreasing transaction sizes Need to increase spread to competition on deposits 12 6

7 Common Trigger Ratios Non-core funding dependence Call report Loan/deposits ratio Call report Brokered deposits/assets Call report Borrowings/assets Call Report Non-current loan ratios Call report Return on assets Call report How do you think regulators will assess your liquidity levels? All Exams review Levels and Trends Note: Some of these ratios have multiple flavors flavors and definitions in source indicated. 13 Performance Issues Balance Sheet Structure & Liquidity Asset Quality Problems Non-Earning Assets More Investments, Less Loans Decrease Non-Core Reliance Higher Capital Requirements ROE (Net Income/Avg. Capital) Net Income Charge-Offs & ALL Lower Yields on AA Cost of Funds Deferred FDIC Insurance Potential Loss of ODP Increasing Efficiency Ratios / Average Capital Note all changes in balance sheet composition have potential impact on earnings, growth and capital formation 14 7

8 Minimizing Cost of Liquidity Goal of Liquidity Management: Ensure sufficient available funds at the lowest possible cost. Requirements of Liquidity Risk Management Program Set objectives around funding costs, funding concentrations, and other financial ratios Establish Cash Flow Forecasting Model to measure sources & uses in business plan Run Scenarios on various funding source cost/benefit 15 Liquidity - Framework Movement away from Static measures Balance sheet liquidity measures Loans/Deposits Loans/Assets Investments/Assets Non-Core Funding Dependence Borrowings/Assets Volatile Funds Ratio Movement toward Dynamic measures Current balance sheet Business strategy or plan Unexpected triggering (stress) events Fail well capitalized status Securitization markets freeze up Corporate CU or bankers bank placed into receivership Requires contingency funding plans 16 8

9 Liquidity Sources & Uses Asset Sources Cash and Cash Equivalents Securities or Loans available for sale Maturing Loans &Securities Loan & Security repayments Liability Sources New Deposit Growth Borrowing Sources Asset Uses Loan Originations Investment Purchases Fixed Asset Purchases Draws on Lines of Credit Liability Uses Deposit Outflows Maturing Borrowings Note: Majority of Sources and Uses are based on Cash Flows associated with assets & liabilities 17 Major Cash Flow Assumptions Option Risk: The risk that the expected cash flows change due to contract options Call Options Put Options Prepayment Options Bump Rate CD/Early Withdrawal Options Changes in Cash Flows Impact Liquidity Levels Income Levels Potentially Credit Risk Levels Lower repayment of loans an indicator of credit problems? 18 9

10 Major Cash Flow Assumptions Prepayment Speeds on Loans & Securities Determining Prepayment Levels Schedule Contractual Repayments Observe Actual Repayments Subtract Actual from Scheduled to arrive at prepayment $ Convert to annual % prepayment by dividing by average balance Compare to National Prepayment speeds to develop factor Example: National Bloomberg Prepayment Speeds = 12% CPR Calculated Speeds = 8% CPR Factor for ALM Model = Bloomberg speeds * 67% Use Bloomberg speeds for all changing rates 19 Control of Liquidity Sources Sources Uses High Estimated Loan Repayments Investment Purchase Term Borrowing Sources Investment Maturities Overnight Borrowings National CDs Local Deposit Growth Advance Repayments Loan Originations Public Fund CDs Overnight Borrowings Local Deposits Many liquidity reports group sources and uses in order of ALCO/Institution Control How do we control sources & uses? Low Brokered CDs Brokered CDs 20 10

11 Liquidity Definitions Asset Based or Core Liquidity: Cash and other financial assets that can be easily converted to cash for operational needs Withdrawals Originations Total (Cash Flow Based) Liquidity : Does your projection maintain sufficient sources to meet financial obligations: withdrawals, loan demands and other commitments. To what extent is liquidity changing level and/or form Should include measures of debt or borrowing capacity. 21 Sound Liquidity Practices Governance BOD and management Appropriate strategies, policies, procedures Cash flow oriented measurement systems Intraday collateral and liquidity management Diverse mix of present and potential funding sources Adequate levels of highly liquid marketable securities Comprehensive contingency funding plans addressing adverse events Internal controls and `audit requirements 22 11

12 A Practical Approach to Liquidity MEASURING ASSET BASED LIQUIDITY 23 Asset Based Liquidity Considered most reliable source of liquidity Many failed institutions had high levels of borrowings and low levels of asset based liquidity, therefore more is better. But, How Much is Enough? Answering the question How long can you survive a crisis without having access to wholesale funding? Requires: An understanding of the sources of asset based liquidity An estimation of the sensitivity of liabilities at risk A method for calculation 24 12

13 US Bank Data MMDA = 21% in 2006 MMDA = 27.8% in 2011 Total NMD funding up from 36% in 06 to 46% in US Credit Union Data MMDA = 14% in 2006 MMDA = 19.5% in 2011 Total NMD funding up from 49.6% in 06 to 55% in

14 Calculating Asset Based Liquidity Sources of Asset Based Liquidity Cash & Cash Equivalents (FF, MMA, etc.) Unpledged Securities (at market value or deeper discounts) Scheduled Investment cash flows and maturities Scheduled Loan cash flows and maturities Uses that you have to cover Firm Loan commitments Maturing Borrowings/Non-Core funding Maturing CDs Some amount of Non-maturity balances considered at risk Potential draw down on lines of credit 27 Basic Surplus Long time measure of 30 day need 28 14

15 Basic Surplus Add to the basic measure in step 2 FHLB availability 29 Basic Surplus Add in other non-core funding sources in Step

16 Advantages Easy measure of real sources Quantifies level of sources by type Provides a measure consistent with policy control limits Basic Surplus Disadvantages Usually used on historical balance sheet Ignores primary source of most community FI liquidity Loan Repayments! Ignores Off Balance Sheet Risks Lines of Credit Firm Commitments to Originate Compare Basic Surplus to New Liquidity Coverage Ratio 31 Asset Based Liquidity: LCR Ratio Basel Liquidity Coverage Ratio (LCR) Test Can you survive a 30 day stress event with assets only? Numerator Cash & Due From Highly Liquid Unencumbered Marketable Securities Denominator Projected Deposit Runoff Loss of all Non-Core Funding renewing in time horizon Projected Increased Line Draw Downs Less Cash Inflows from loans (& securities?) - Limited amounts included Note that this is the first Liquidity rate to consider loan cash flows as a source! 32 16

17 Deposit Definitions Stable/Less Stable Basel Says Stable is Fully insured Meaningful business relationship Applies to retail, small business, large business Penalties adequate on CDs just count 30 day maturities Penalties inadequate count all the balances Less Stable Deposits not meeting the above definition Bank Regulators (Likely) Fully Insured Call Reports Internal systems? Not sure how bank regulators will deal with penalty issue 33 Liquidity Coverage Ratio Numerator (Basel Approach) We would add stressed cash flows coming off loans and non-highly liquid securities. Available liquid assets in 30 days 34 17

18 Liquidity Coverage Ratio Funding Outflows Denominator Sum of Outflows = Potential 30 day liquidity needs 35 Liquidity Coverage Ratio Net Loan Outflows 36 18

19 Liquidity Coverage Ratio Available Needs FARIN Suggested LCR Changes: Move Loan Cash Flows to the Numerator to track all Sources together Establish consistency on deposit outflow assumptions with core deposit study info used in IRR Calculations Remove limit on amount of total loan flows counted (Move to numerator eliminates negative denominator Remove prepayment limitation assumptions on loan flows Consider calculating how much runoff would be necessary to fail assuming sources are solid. 37 Net Stable Funding Ratio Ratio Introduced in Original Basel III Proposal Designed to look at 1 Year Potential Funding Needs Numerator stable funding Denominator assets needing stable funding Guideline - >=100% Not planned to phase-in until 2019 Why we choose not incorporate into Liquidity Calculations Static ratio Lots of clarification needed Late phase-in Unsure how US regulators will interpret Adopting internal sources and uses provides more meaningful measurement Regulatory Attempt at Sources & Uses But Static! 38 19

20 Net Stable Funding Ratio Compares Available Liquidity Sources To Known maturities & loan renewal/payoffs Plus OBS exposures 39 Net Stable Funding Ratio Example shows institution short $34 million Options for Correcting? Lower reliance on assets with higher funding needs Fixed assets require $1 for every $1 How fast can this be changed? Lower off balance sheet exposures Firm commitments Reduce outstanding lines of credit Change mix in deposit funding or terms or both High concentration of brokered deposits < 1 Yr which are not given full credit Rely on Wholesale Funding 40 20

21 Net Stable Funding Ratio Advantages Can be easily captured from call report data Requires minimal new changes Eliminates Assumption Risk from Analysis Disadvantages Removes all unused wholesale sourcing from calculation Not Effective in Examining the Cost/Benefit of various alternative strategies Rewards long-term borrowing position without regard to cost 41 Measuring Cash Flow Bases Liquidity LIQUIDITY GAP ANALYTICS 42 21

22 Liquidity Gap Report Pro forma cash flow analysis: Projected sources and uses of funds over various scenarios Like rate movements or what-if plans Show exposures to variables and report to board and establish contingencies What sources change and why (optionality, credit risk, performance risk) What uses change and why (loan demand, potential deposit outflow, etc.) Assumptions should be reasonable and appropriate. Institutions with reliance on securitization and sale for cash should consider impact of conditions that may effect availability of funds. 43 Liquidity Gap Report Liquidity Gap Report Summary of Cash Flow sources and uses impact on liquidity Use a forecast (Plan) for growth assumptions Use starting cash flows to project inflows and outflows Allows for Assessment of Contingency Funding Plan Stress Tests to Determine Liquidity needs Impact of missing deposit growth by 10% What if loan repayments accelerate or slow? What happens to total ratio if access to key funding sources is gone? Brokered CDs FHLB 44 22

23 Liquidity Gap - Base Assets Madison Bank & Trust Forecast Cash Flow Liquidity Report Base Case [GI Base Jun-2011] With Liquidity Event Scenario Default Liquidity Report Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 (Dollars in Thousands) Total Investments Sources 19,719, ,295, ,181, ,366, ,636, ,931, ,969, ,976,678.9 Uses 17,789, ,609, ,625, ,910, ,351, ,769, ,944, ,127,660.9 Net 1,929, ,685, ,555, ,456, ,284, ,161, ,024, ,018.0 Total Loans Sources 312,804, ,122, ,105, ,286, ,003, ,006, ,598, ,800,427.3 Uses 320,677, ,044, ,077, ,308, ,076, ,128, ,772, ,025,218.5 Net -7,873, ,922, ,972, ,021, ,072, ,122, ,173, ,224,791.1 Total Other Assets Sources 106,459, ,651, ,897, ,051, ,721, ,185, ,446, ,354,394.6 Uses 111,188, ,962, ,344, ,830, ,365, ,233, ,527, ,543,372.7 Net -4,728, ,311, ,446, ,779, ,356, ,952, ,918, ,811,021.8 TOTAL ASSETS Sources 635,139, ,775, ,575, ,598, ,841, ,897, ,359, ,936,511.5 Uses 606,214, ,537, ,164, ,024, ,036, ,515, ,271, ,285,591.3 Net 28,924, ,762, ,588, ,425, ,194, ,618, ,912, ,349, Liquidity Gap - Base Liabilities & Equity Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Total Deposits Sources 205,936, ,775, ,193, ,876, ,798, ,921, ,680, ,364,473.1 Uses 225,217, ,184, ,141, ,746, ,984, ,123, ,860, ,019,282.6 Net -19,280, ,590, ,051, ,129, ,813, ,797, ,820, ,345,190.6 Total Borrowed Funds Sources Uses 112, , , , , ,121, , ,125,524.7 Net -112, , , , , ,121, , ,125,524.7 TOTAL LIABILITIES Sources 254,169, ,186, ,657, ,738, ,353, ,698, ,092, ,230,790.5 Uses 279,700, ,218, ,291, ,255, ,381, ,870, ,242, ,805,473.2 Net -25,531, ,968, ,366, ,483, ,972, ,827, ,850, ,425,317.3 TOTAL EQUITY Sources , , , , , ,415.4 Uses Net , , , , , ,

24 Liquidity Gap - Base Liquidity Report Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 (Dollars in Thousands) Summary & Ratios Total Net Sources 126,356, ,083, ,612, ,230, ,756, ,890, ,020, ,856,258.0 Total Net Uses 140,151, ,850, ,276, ,079, ,271, ,046, ,081, ,957,297.4 Net Sources/Uses -13,794, ,767, ,664, ,848, ,515, ,155, ,938, ,101,039.4 Cumulative Total Sources 126,356, ,440, ,052, ,282, ,039, ,929, ,950, ,806,553.4 Cumulative Total Uses 140,151, ,002, ,279, ,358, ,629, ,675, ,757, ,714,565.7 Cumulative Sources/Uses -13,794, ,562, ,226, ,075, ,590, ,745, ,806, ,908,012.3 Sources/Uses Ratio % % % % % % % % Cumulative Sources/Uses Ratio % % % % % % % % Liquidity CF Gap/Assets % % % % % % 0.652% % Cumulative Liquidity CF Gap/Assets % % % % % % % % Adjustments Total Remaining Borrowing Capacit 39,674, ,712, ,751, ,790, ,830, ,870, ,912, ,954,174.7 Hiqh Quality Liquid Assets 46,152, ,915, ,616, ,378, ,161, ,957, ,717, ,498,283.8 Total Sources Adjustments 85,827, ,628, ,367, ,168, ,991, ,828, ,629, ,452,458.5 Total Uses Adjustments Net Adjustments 85,827, ,628, ,367, ,168, ,991, ,828, ,629, ,452,458.5 MB&T cash flow liquidity is negative prior to adjustments for HQLA and Borrowing capacity 47 Liquidity Gap - Base Liquidity Report Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 (Dollars in Thousands) Summary & Ratios Cumulative Sources/Uses w/adjus 72,032, ,066, ,141, ,093, ,401, ,082, ,822, ,544,446.2 Total Net Sources 126,356, ,083, ,612, ,230, ,756, ,890, ,020, ,856,258.0 Sources/Uses Ratio % % % % % % % % Cumulative Sources/Uses Ratio % % % % % % % % Liquidity Gap/Assets % % % % % % % % Cumulative Liquidity Gap/Assets % % % % % % % % Liquidity Coverage Ratio % % % % % % % % 3 Month Average % % % % % % MB&T liquidity is highly positive when considering adjustments for HQLA and Borrowing capacity. Note also that the plan shows an increasing and stable LCR position indicating that short-term asset based liquidity is sufficient 48 24

25 Liquidity Policy Limits SETTING LIMITS & TRIGGERS 49 Liquidity Policy Limits Limits should indicate base plan levels of risk As stress tests are added, a second level of limits are required to Reflect levels of sources required to survive liquidity stress events Outline likely actions In addition to limits, trigger ratio ranges set to act as early warning signals to plan goals 50 25

26 Setting LCR Limits 51 Trigger Ratios Trigger Ratios define key variables early warnings of strategic goal issues Examples Loan/Deposit Ratios Non-Core Funding/Assets Basic Surplus Ratio(s) Brokered CD/Total Deposit Ratio Borrowings/assets Nonperforming Loans/Total Loans Charge-offs/Recoveries ALCO reporting must include these key monitoring items in all scenario testing 52 26

27 Liquidity Gap/Asset Limits 12 Month Liquidity Gap/Asset Ratio Threat Level Actions => 15% Green Light No actions required, continue normal monitoring and reporting >= 10% and <15% Yellow Light Develop options for asset or liability changes in plan to return to Green within 6 months. < 10% Red Light Immediate plan changes to be implemented and impact of Contingency Funding Plan assessed for realistic stress events. Monitoring monthly until return to Yellow 53 Contingency Funding Plans (CFP) ROLE OF THE CFP 54 27

28 Genesis of the CFP Intended to set boundaries on various funding activities Acting like a liability concentration policy Outlines primary and secondary funding sources Identifies when institution will use various sources Assigns responsibilities for managing events Defines Crisis Events and Stress Tests Short Term 3 Month projection of cash flows Normal plan 10% and 20% deposit runoff Long Term 12 Month projections Assumes cut off from many wholesale sources How much would you have to raise to survive? 55 Genesis of CFP Issues in initial approach Liquidity events are defined in a vacuum No consideration for other impacts of the stress test Income Capital Short term (< 12 months) Current ALCO guidance looks at minimum of 24 months for earnings at risk Applies big bank approaches to community institutions Result: Institutions carry more assets to cover loss of wholesale funding that may or may not occur

29 Stress Tests Midwest Ag Lender Scenario: Primary Clients:: farmers in grain markets and corn has been at all-time highs. Concern over future prices Risks to Cash Flow: Grain price fluctuations, Crop damage due to weather, Spikes in production costs Potential Impacts: Credit and Liquidity Risks if prices drop Stress Tests: Loans for price changes Balance sheet for cash flow and earnings implications 57 Stress Tests Typical Community Bank Lender Scenario: Large balances in liquid assets Excess cash invested into agency bonds and MBS in Bonds purchased at 3-6% premiums Economy Forecasted to Recover early 2013 Projecting increase in loan balances funded by excess cash and investment repayment Deposit costs rising and potential loss of deposits to higher rate products (NOT STATIC) or disintermediation Stress test: Deposits leave at faster rate or greater % move to higher rate sector Bonds sold at discount (market value) and premium write-down to fund loan commitments and fund withdrawals Increased use of Wholesale funding to meet needs 58 29

30 Scenario Management Scenarios effect the entire institution not just one risk area Key Challenge: translating scenarios into enterprise-wide measures Balance sheet and income statement Cash flow impact Key ratio analysis Individual risk limits Secondary Challenge: How much insurance do you buy? Based on likelihood of the scenario? 59 Sample Economic Scenarios Base Case Key Forecast Assumptions (60%) Fiscal Policy: Automatic Spending Cuts and the Bush Tax Cuts. do not expect the automatic spending cuts now scheduled to begin in January 2013 to take effect assume new Congress and president will produce a package of spending cuts and tax increases including cuts in Medicare, Medicaid, and Social Security, and increases in income tax. Begin in January 2014; assume Bush tax cuts extended for Oil Prices Resilient. Expect refiners acquisition cost for crude oil to average $113/ barrel in Corresponds to average price for Brent oil $120/barrel in

31 Sample Economic Scenarios Base Case Key Forecast Assumptions (60%) Federal Reserve to Hold Rates Near Zero Until late The Fed has said that it expects to keep its federal funds target in the % range until at least late We assume that the Fed will start to hike rates in November of Global Growth Slowing. expect GDP growth in the United States major-currency trading partners to weaken to 1.1% in 2012, from 1.8% in This mainly reflects a recession in the Eurozone, where we expect GDP to contract around 0.5%. GDP growth for other important trading partners is projected to slow to 4.3% in 2012, from 5.3% in Sample Economic Scenarios High Rate Key Forecast Assumptions (20%) Better news from Europe and the Middle East boost stock markets. Oil prices fall and US economic growth accelerates, leading the Fed to raise interest rates in late 2013 (instead of 2014). Safe-haven demand falls, sending the US dollar lower against major currencies and driving long-term interest rates higher. Impact: Fast loan growth pressures liquidity Rising cost of funds squeezes margins Capital management under double pressure Rapid denominator growth Slower earnings growth 62 31

32 Sample Economic Scenarios Low Rate Key Forecast Assumptions (20%) Oil and Europe combine to tip the economy back into recession. Spanish borrowing costs rise to unsustainable levels leading to a default. Credit markets freeze in Europe and lead to much tighter credit conditions worldwide. Panic settles upon financial markets as stock prices plummet and investors race to the safety of US Treasuries. Fading economic growth and disinflation push the Fed to keep interest rates near zero through 2015 & expand balance sheet further. Long-term interest rates stay low for longer. Impact: Slow loan growth, yield compression, credit risks rise, more deposit growth (flight to safety) 63 Evaluating Your Liquidity Risk Management Process LIQUIDITY THE HOLY GRAIL 64 32

33 Step 1 Describe key balance sheet (static liquidity) ratios that management uses to measure and manage liquidity risk. Are they used as policy guidelines (limits) or as triggers? Discuss specific strengths and weaknesses of the ratios. Ratios Like Loans/Deposits Loans/Assets Investments/Assets Non-Core Funding Dependence Borrowings/Assets Volatile Funds Ratio Trigger Ratios: Measurement used to alert of problems Policy Ratios: Measures that define Risk and Action 65 Step 2 Determine if you measure liquidity risk using expected cash inflows and outflows (liquidity gap derived from sources and uses) What time intervals? How are the sources/uses determined? Consistent with other ALCO measures? List key assumptions made in your analysis. Pay attention to: Alternative ways of evaluating sources. Alternative ways of evaluating uses Use of these reports in evaluating: Base strategy Stress events 66 33

34 Step 3 Outline your institution s approach to using non-core sources of funding (i.e., brokered CDs, internet CDs, public funds, repurchase agreements, FHLB borrowings, etc.). Review liquidity and ALM policy Is this activity addressed within the institution's policy(s)? Are limits in place at the individual source level? Are there overall limits on the use of non-core funding? With the changing regulatory view of wholesale and non-core funding you must establish your view of the use of such sources in your capital planning process. 67 Step 4 Identify liquidity sources at your institution and categorize them into timeframes of availability such as immediate (availability is daily), intermediate (availability in 1-2 weeks), other (availability in 2-4 weeks). Pay attention to: How diversified are your sources. Have you tested their availability and how quickly they cam be brought on line. Then categorize based on source and availability Consider both asset based sources and liability based sources

35 Step 5 Indicate the kinds of liquidity stress events identified by management as potential sources of liquidity stress. Does your policy incorporate stress tests in your analysis? Attach an example of any stress tests that have been performed. Discuss briefly what the stress tests indicate. Pay attention to: My listing of stress events. Has your institution identified yours? Is falling below PCA capital minimums one of them? Have stress tests been run on these events? What do you conclude from the tests 69 Step 6 Briefly, describe the institution s contingency funding plan if one exists. Pay attention to: Whether the CFP is broad and general Does the CFP deal specifically with the stress events identified in Step 5 Are the plans spelled out in detail including identifying those that are responsible for execution 70 35