Proposed Interagency Guidance-Funding and Liquidity Risk Management, 32035-32044 [E9-15800]

Download as PDF Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices DATES: Written comments should be received on or before September 4, 2009 to be assured of consideration. ADDRESSES: Direct all written comments to R. Joseph Durbala, Internal Revenue Service, Room 6129, 1111 Constitution Avenue, NW., Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Requests for additional information or copies of the form and instructions should be directed to Dawn Bidne at Internal Revenue Service, Room 6129, 1111 Constitution Avenue, NW., Washington, DC 20224, or at (202) 622– 3933, or through the Internet at Dawn.E.Bidne@irs.gov. mstockstill on PROD1PC66 with NOTICES SUPPLEMENTARY INFORMATION: Title: Excise Tax on Structured Settlement Factoring Transactions. OMB Number: 1545–1826. Form Number: 8876. Abstract: Form 8876 is used to report structured settlement transactions and pay the applicable excise tax. Current Actions: There are no changes being made to the form at this time. Type of Review: Extension of a currently approved collection. Affected Public: Business or other forprofit organizations and individuals. Estimated Number of Respondents: 100. Estimated Time per Respondent: 5 hours, 36 minutes. Estimated Total Annual Burden Hours: 560. The following paragraph applies to all of the collections of information covered by this notice: An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Request for Comments: Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval. All comments will become a matter of public record. Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. Approved: June 22, 2009. R. Joseph Durbala, IRS Reports Clearance Officer. [FR Doc. E9–15725 Filed 7–2–09; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency [Docket ID OCC–2009–0009] FEDERAL RESERVE SYSTEM [Docket No. OP–1362] FEDERAL DEPOSIT INSURANCE CORPORATION DEPARTMENT OF THE TREASURY Office of Thrift Supervision [Docket ID OTS–2009–0011] NATIONAL CREDIT UNION ADMINISTRATION Proposed Interagency Guidance— Funding and Liquidity Risk Management AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (FRB); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA). ACTION: Notice with request for comment. SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies) in conjunction with the Conference of State Bank Supervisors (CSBS), request comment on the proposed guidance on funding and liquidity risk management (proposed Guidance). The proposed Guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, where appropriate, brings them into conformance with the ‘‘Principles for Sound Liquidity Risk Management and Supervision’’ issued by the Basel Committee on Banking Supervision (BCBS) in September 2008. While the BCBS liquidity principles primarily focuses on large internationally active PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 32035 financial institutions, the proposed guidance emphasizes supervisory expectations for all domestic financial institutions including banks, thrifts and credit unions. DATES: Comments must be submitted on or before September 4, 2009. ADDRESSES: Comments should be directed to: OCC: Because paper mail in the Washington, DC area and at the Agencies is subject to delay, commenters are encouraged to submit comments by e-mail, if possible. Please use the title ‘‘Proposed Interagency Guidance—Funding and Liquidity Risk Management’’ to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • E-mail: regs.comments@occ.treas.gov. • Mail: Office of the Comptroller of the Currency, 250 E Street, SW., Mail Stop 2–3, Washington, DC 20219. • Fax: (202) 874–5274. • Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2–3, Washington, DC 20219. Instructions: You must include ‘‘OCC’’ as the agency name and ‘‘Docket ID OCC–2009–0009’’ in your comment. In general, OCC will enter all comments received into the docket without change, including any business or personal information that you provide such as name and address information, e-mail addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this notice by any of the following methods: • Viewing Comments Personally: You may personally inspect and photocopy comments at the OCC, 250 E Street, SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874–4700. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect and photocopy comments. • Docket: You may also view or request available background documents and project summaries using the methods described above. FRB: You may submit comments, identified by Docket No. OP–1362, by any of the following methods: E:\FR\FM\06JYN1.SGM 06JYN1 mstockstill on PROD1PC66 with NOTICES 32036 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices • Agency Web Site: http:// www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm. • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • E-mail: regs.comments@federalreserve.gov. Include the docket number in the subject line of the message. • Fax: 202/452–3819 or 202/452– 3102. • Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. All public comments are available from the FRB’s Web site at http:// www.federalreserve.gov/generalinfo/ foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed in electronic or paper form in Room MP–500 of the FRB’s Martin Building (20th and C Streets, NW.) between 9 a.m. and 5 p.m. on weekdays. FDIC: You may submit comments by any of the following methods: • Agency Web Site: http:// www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web site. • E-mail: Comments@FDIC.gov. Include ‘‘Proposed Interagency Guidance—Funding and Liquidity Management Risk’’ in the subject line of the message. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. • Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. (EST). • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. Public Inspection: All comments received will be posted without change to http://www.fdic.gov/regulations/laws/ federal, including any personal information provided. Comments may be inspected and photocopied in the FDIC Public Information Center, 3501 North Fairfax Drive, Room E–1002, Arlington, VA 22226, between 9 a.m. and 5 p.m. (EST) on business days. Paper copies of public comments may be ordered from the Public Information Center by telephone at (877) 275–3342 or (703) 562–2200. VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 OTS: You may submit comments, identified by OTS–2009–0011, by any of the following methods: • E-mail address: regs.comments@ots.treas.gov. Please include ID OTS–2009–0011 in the subject line of the message and include your name and telephone number in the message. • Fax: (202) 906–6518. • Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, Attention: ID OTS–2009–0011. • Hand Delivery/Courier: Guard’s Desk, East Lobby Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: Regulation Comments, Chief Counsel’s Office, Attention: ID OTS–2009–0011. Instructions: All submissions received must include the agency name and docket number for this notice. All comments received will be posted to the OTS Internet Site at http://www.ots. treas.gov/Supervision&Legal.Laws& Regulations without change, including any personal information provided. Comments including attachments and other supporting materials received are part of the public record and subject to public disclosure. Do not enclose any information in your comments or supporting materials that you consider confidential or inappropriate for public disclosure. • Viewing Comments On-Site: You may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment for access, call (202) 906–5922, send an e-mail to public.info@ots.treas.gov, or send a facsimile transmission to (202) 906–6518. (Prior notice identifying the materials you will be requesting will assist us in serving you.) We schedule appointments on business days between 10 a.m. and 4 p.m. In most cases, appointments will be available the next business day following the date we receive a request. NCUA: You may submit comments by any of the following methods (Please send comments by one method only): • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. NCUA Web Site: http:// www.ncua.gov/Resources/ RegulationsOpinionsLaws/ ProposedRegulations.aspx. Follow the instructions for submitting comments. • E-mail: Address to regcomments@ncua.gov. Include ‘‘[Your name] Comments on Proposed Interagency Guidance—Funding and Liquidity Risk Management,’’ in the e-mail subject line. PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 • Fax: (703) 518–6319. Use the subject line described above for e-mail. • Mail: Address to Mary F. Rupp, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314– 3428. • Hand Delivery/Courier: Same as mail address. Public inspection: All public comments are available on the agency’s Web site at http://www.ncua.gov/ Resources/RegulationsOpinionsLaws/ ProposedRegulations.aspx as submitted, except as may not be possible for technical reasons. Public comments will not be edited to remove any identifying or contact information. Paper copies of comments may be inspected in NCUA’s law library, at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703) 518–6546 or send an e-mail to OGC Mail @ncua.gov. FOR FURTHER INFORMATION CONTACT: OCC: Kerri Corn, Director for Market Risk, Credit and Market Risk Division, (202) 874–5670 or J. Ray Diggs, Group Leader: Balance Sheet Management, Credit and Market Risk Division, (202) 874–5670. FRB: James Embersit, Deputy Associate Director, Market and Liquidity Risk, 202–452–5249 or Mary Arnett, Supervisory Financial Analyst, Market and Liquidity Risk, 202–721– 4534 or Brendan Burke, Supervisory Financial Analyst, Supervisory Policy and Guidance, 202–452–2987 FDIC: Kyle Hadley, Chief Capital Markets Examination Support, (202) 898–6532. OTS: Jeff Adams, Capital Markets Specialist, Risk Modeling and Analysis, (202) 906–6388 or Marvin Shaw, Senior Attorney, Regulations and Legislation Division, (202) 906–6639. NCUA: John Bilodeau, Program Officer, Examination and Insurance, (703) 518–6618. SUPPLEMENTARY INFORMATION: I. Background The recent turmoil in the financial markets emphasizes the importance of good liquidity risk management to the safety and soundness of financial institutions. Supervisors worked on an international and national level through various groups (e.g., Basel Committee on Banking Supervision, Senior Supervisors Group, Financial Stability Forum) to assess the implications from the current market conditions on an institution’s assessment of liquidity risk and the supervisor’s approach to liquidity risk supervision. The industry E:\FR\FM\06JYN1.SGM 06JYN1 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices through the Institute of International Finance (IIF) also performed work in the area of liquidity risk and issued guidelines in 2008. Additionally, supervisors in Europe and Asia have also worked on domestic liquidity guidance. This guidance focuses on all domestic financial institutions, including banks, thrifts, and credit unions. The proposed guidance emphasizes the key elements of liquidity risk management already addressed separately by the agencies, and provides consistent interagency expectations on sound practices for managing funding and liquidity risk. mstockstill on PROD1PC66 with NOTICES II. Request for Comment The agencies request comments on all aspects of the proposed guidance. III. Paperwork Reduction Act In accordance with section 3512 of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501–3521 (PRA), the Agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the Federal banking agencies’ functions, including whether the information has practical utility; (b) The accuracy of the estimates of the burden of the information collection, including the validity of the methodology and assumptions used; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; (d) Ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) Estimates of capital or start up costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record. Comments should be addressed to: OCC: Please follow the instructions found in the ADDRESSES caption above for submitting comments. FRB: Please follow the instructions found in the ADDRESSES caption above for submitting comments. FDIC: Interested parties are invited to submit written comments to the FDIC by any of the following methods. All comments should refer to the name of the collection: • http://www.FDIC.gov/regulations/ laws/federal/notices.html VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 • E-mail: comments@fdic.gov Include the name of the collection in the subject line of the message. • Mail: Leneta G. Gregorie (202–898– 3719), Counsel, Room F–1064, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. • Hand Delivery: Comments may be hand-delivered to the guard station at the rear of the 17th Street Building (located on F Street), on business days between 7 a.m. and 5 p.m. OTS: Please follow the instructions found in the ADDRESSES caption above for submitting comments. NCUA: Please follow the instructions found in the ADDRESSES caption above for submitting comments. All Agencies: A copy of the comments may also be submitted to the OMB desk officer for the Agencies: Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Washington, DC 20503. Title of Information Collection: Funding and Liquidity Risk Management. OMB Control Numbers: New collection; to be assigned by OMB. Abstract: Section 14 states that institutions should consider liquidity costs, benefits, and risks in strategic planning and budgeting processes. Significant business activities should be evaluated for liquidity risk exposure as well as profitability. More complex and sophisticated institutions should incorporate liquidity costs, benefits, and risks in the internal product pricing, performance measurement, and new product approval process for all material business lines, products and activities. Incorporating the cost of liquidity into these functions should align the risk-taking incentives of individual business lines with the liquidity risk exposure their activities create for the institution as a whole. The quantification and attribution of liquidity risks should be explicit and transparent at the line management level and should include consideration of how liquidity would be affected under stressed conditions. Section 20 would require that liquidity risk reports provide aggregate information with sufficient supporting detail to enable management to assess the sensitivity of the institution to changes in market conditions, its own financial performance, and other important risk factors. Institutions should also report on the use of and availability of government support, such as lending and guarantee programs, and implications on liquidity positions, particularly since these programs are PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 32037 generally temporary or reserved as a source for contingent funding. Affected Public: OCC: National banks, their subsidiaries, and Federal branches or agencies of foreign banks. FRB: Bank holding companies and state member banks. FDIC: Insured state nonmember banks. OTS: Federal savings associations and their affiliated holding companies. NCUA: Federally-insured credit unions. Type of Review: Regular. Estimated Burden: OCC: Number of respondents: 1,560 total (13 large (over $100 billion in assets), 29 mid-size ($10–$100 billion), 1,518 small (less than $10 billion)). Burden under Section 14: 720 hours per large respondent, 240 hours per mid-size respondent, and 80 hours per small respondent. Burden under Section 20: 4 hours per month. Total estimated annual burden: 212,640 hours. FRB: Number of respondents: 5,892 total (26 large (over $100 billion in assets), 71 mid-size ($10–$100 billion), 5,795 small (less than $10 billion)). Burden under Section 14: 720 hours per large respondent, 240 hours per mid-size respondent, and 80 hours per small respondent. Burden under Section 20: 4 hours per month. Total estimated annual burden: 782,176 hours. FDIC: Number of respondents: 5,076 total (10 large (over $20 billion in assets), 309 mid-size ($1–$20 billion), 4,757 small (less than $1 billion)). Burden under Section 14: 720 hours per large respondent, 240 hours per mid-size respondent, and 80 hours per small respondent. Burden under Section 20: 4 hours per month. Total estimated annual burden: 705,564. OTS: Number of respondents: 801 total (14 large (over $100 billion in assets), 104 mid-size ($10–$100 billion), 683 small (less than $10 billion)). Burden under Section 14: 720 hours per large respondent, 240 hours per mid-size respondent, and 80 hours per small respondent. Burden under Section 20: 4 hours per month. Total estimated annual burden: 128,128. NCUA: E:\FR\FM\06JYN1.SGM 06JYN1 32038 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices Number of respondents: 7,736 total (153 large (over $1 billion in assets), 501 mid-size ($250 million to $1 billion), and 7,082 small (less than $250 million)). Burden under Section 14: 240 hours per large respondent, 80 hours per midsize respondent, and 20 hours per small respondent. Burden under Section 20: 2 hours per month. Total estimated annual burden: 404,104. IV. Guidance The text of the proposed Guidance on Funding and Liquidity Risk Management is as follows: Interagency Guidance on Funding and Liquidity Risk Management mstockstill on PROD1PC66 with NOTICES 1. The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) (collectively, ‘‘the agencies’’) in conjunction with the Conference of State Bank Supervisors (CSBS) 1 are issuing this guidance to provide consistent interagency expectations on sound practices for managing funding and liquidity risk. The guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past 2 and, where appropriate, brings these principles into conformance with the international guidance recently issued by the Basel Committee on Banking Supervision titled ‘‘Principles for Sound Liquidity Risk Management and Supervision.3 1 The various state banking supervisors may implement this policy statement through their individual supervisory process. 2 For national banks, see the Comptroller’s Handbook on Liquidity. For state member banks and bank holding companies, see the Federal Reserve’s Commercial Bank Examination Manual (section 4020), Bank Holding Company Supervision Manual (section 4010), and Trading and Capital Markets Activities Manual (section 2030). For State non-member banks, see the FDIC’s Revised Examination Guidance for Liquidity and Funds Management (Trans. No. 2002–01) (Nov. 19, 2001) as well as Financial Institution Letter 84–2008, Liquidity Risk Management (August 2008). For savings associations, see the Office of Thrift Supervision’s Examination Handbook, section 530, ‘‘Cash Flow and Liquidity Management’’; and the Holding Companies Handbook, section 600. For credit unions, see Letter to Credit Unions No. 02– CU–05, Examination Program Liquidity Questionnaire (March 2002). Also see Basel Committee on Banking Supervision, ‘‘Principles for Sound Liquidity Risk Management and Supervision,’’ (September 2008). 3 Basel Committee on Banking Supervision, ‘‘Principles for Sound Liquidity Risk Management and Supervision’’, September 2008. See http:// www.bis.org/publ/bcbs144.htm. Federally-insured VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 2. Recent events illustrate that liquidity risk management at many financial institutions is in need of improvement. Deficiencies include insufficient holdings of liquid assets, funding risky or illiquid asset portfolios with potentially volatile short-term liabilities, and a lack of meaningful cash flow projections and liquidity contingency plans. 3. The following guidance reiterates the process that institutions should follow to appropriately identify, measure, monitor and control their funding and liquidity risk. In particular, the guidance re-emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal well-developed contingency funding plan (CFP) as primary tools for measuring and managing liquidity risk. The agencies expect all financial institutions 4 to manage liquidity risk using processes and systems that are commensurate with the institution’s complexity, risk profile, and scope of operations. Liquidity risk management processes and plans should be well documented and available for supervisory review. Failure to maintain an adequate liquidity risk management process is considered an unsafe and unsound practice. Liquidity and Liquidity Risk 4. Liquidity is a financial institution’s capacity to meet its cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the institution. 5. Liquidity risk is the risk that an institution’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its contractual obligations. An institution’s obligations and the funding sources used to meet them depend significantly on its business mix, balance-sheet structure, and the cash-flow profiles of its on- and off-balance-sheet obligations. In managing their cash flows, institutions confront various situations that can give rise to increased liquidity credit unions are not subject to principles issued by the Basel Committee. 4 Unless otherwise indicated, this interagency guidance uses the term ‘‘financial institutions’’ or ‘‘institutions’’ to include banks, saving associations, credit unions, and affiliated holding companies. Federally-insured credit unions (FICUs) do not have holding company affiliations and therefore references to holding companies contained within this guidance are not applicable to FICUs. PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 risk. These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity), and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operation, legal, and reputation risks also can affect an institution’s liquidity risk profile and should be considered in the assessment of liquidity and asset/ liability management. Sound Practices of Liquidity Risk Management 6. An institution’s liquidity management process should be sufficient to meet its daily funding needs, and cover both expected and unexpected deviations from normal operations. Accordingly, institutions should have a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk. Because of the critical importance to the viability of the institution, liquidity risk management should be fully integrated into the institution’s risk management processes. Critical elements of sound liquidity risk management include: • Effective corporate governance consisting of oversight by the board of directors and active involvement by management in an institution’s control of liquidity risk. • Appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk. • Comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the institution. • Active management of intraday liquidity and collateral. • An appropriately diverse mix of existing and potential future funding sources. • Adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in stressful situations. • Comprehensive contingency funding plans (CFPs) that sufficiently address potential adverse liquidity events and emergency cash flow requirements. • Internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process. Supervisors will assess these critical elements in their reviews of an institution’s liquidity risk management E:\FR\FM\06JYN1.SGM 06JYN1 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices mstockstill on PROD1PC66 with NOTICES process in relation to its size, complexity, and scope of operations. Corporate Governance 7. The board of directors is ultimately responsible for the liquidity risk assumed by the institution. As a result, the board should ensure that the institution’s liquidity risk tolerance is established and communicated in such a manner that all levels of management clearly understand the institution’s approach to managing the trade-offs between liquidity risk and profits. The board of directors or its delegated committee of board members should oversee the establishment and approval of liquidity management strategies, policies and procedures, and review them at least annually. In addition, the board should ensure that it: • Understands the nature of the liquidity risks of its institution and periodically reviews information necessary to maintain this understanding. • Establishes executive-level lines of authority and responsibility for managing the institution’s liquidity risk. • Enforces management’s duties to identify, measure, monitor, and control liquidity risk. • Understands and periodically reviews the institution’s CFPs for handling potential adverse liquidity events. • Comprehends the liquidity risk profiles of important subsidiaries and affiliates as appropriate. 8. Senior management is responsible for ensuring that board-approved strategies, policies, and procedures for managing liquidity (on both a long-term and day-to-day basis) are appropriately executed within the lines of authority and responsibility designated for managing and controlling liquidity risk. This includes overseeing the development and implementation of appropriate risk measurement and reporting systems, liquid buffers of unencumbered marketable securities, CFPs, and an adequate internal control infrastructure. Senior management is also responsible for regularly reporting to the board of directors on the liquidity risk profile of the institution. 9. Senior management should determine the structure, responsibilities, and controls for managing liquidity risk and for overseeing the liquidity positions of the institution. These elements should be clearly documented in liquidity risk policies and procedures. For institutions comprised of multiple entities, such elements should be fully specified and documented in policies for each material legal entity and subsidiary. VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 Senior management should be able to monitor liquidity risks for each entity across the institution on an ongoing basis. Processes should be in place to ensure that the group’s senior management is actively monitoring and quickly responding to all material developments, and reporting to the board of directors as appropriate. 10. Institutions should clearly identify the individuals or committees responsible for implementing and making liquidity risk decisions. When an institution uses an asset/liability committee (ALCO) or other similar senior management committee, the committee should actively monitor the institution’s liquidity profile and should have sufficiently broad representation across major institutional functions that can directly or indirectly influence the institution’s liquidity risk profile (e.g., lending, investment securities, wholesale and retail funding, etc.). Committee members should include senior managers with authority over the units responsible for executing liquidity-related transactions and other activities within the liquidity risk management process. In addition, the committee should ensure that the risk measurement system adequately identifies and quantifies risk exposure. The committee also should ensure that the reporting process communicates accurate, timely, and relevant information about the level and sources of risk exposure. Strategies, Policies, Procedures, and Risk Tolerances 11. Institutions should have documented strategies for managing liquidity risk and clear policies and procedures for limiting and controlling risk exposures that appropriately reflect the institution’s risk tolerances. Strategies should identify primary sources of funding for meeting daily operating cash outflows, as well as seasonal and cyclical cash flow fluctuations. Strategies should also address alternative responses to various adverse business scenarios.5 Policies and procedures should provide for the formulation of plans and courses of actions for dealing with potential temporary, intermediate-term, and longterm liquidity disruptions. Policies, procedures, and limits also should address liquidity separately for individual currencies, legal entities, and business lines, when appropriate and 5 In formulating liquidity management strategies, members of complex banking groups should take into consideration their legal structures (branches versus separate legal entities and operating subsidiaries), key business lines, markets, products, and jurisdictions in which they operate. PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 32039 material, as well as allow for legal, regulatory, and operational limits for the transferability of liquidity. Senior management should coordinate the institution’s liquidity risk management with disaster, contingency, and strategic planning efforts, as well as with business line and risk management objectives, strategies, and tactics. 12. Policies should clearly articulate a liquidity risk tolerance that is appropriate for the business strategy of the institution considering its complexity, business mix, liquidity risk profile, and its role in the financial system. Policies should also contain provisions for documenting and periodically reviewing assumptions used in liquidity projections. Policy guidelines should employ both quantitative targets and qualitative guidelines. These measurements, limits, and guidelines may be specified in terms of the following measures and conditions, as applicable: • Cash flow projections that include discrete and cumulative cash flow mismatches or gaps over specified future time horizons under both expected and adverse business conditions. • Target amounts of unpledged liquid asset reserves. • Measures used to identify volatile liability dependence and liquid asset coverage ratios. For example, these may include ratios of wholesale funding to total liabilities, potentially volatile retail (e.g., high-cost or out-of-market) deposits to total deposits, and other liability dependency measures, such as short-term borrowings as a percent of total funding. • Asset concentrations that could increase liquidity risk through a limited ability to convert to cash (e.g., complex financial instruments,6 bank-owned (corporate-owned) life insurance, and less marketable loan portfolios). • Funding concentrations that address diversification of funding sources and types, such as large liability and borrowed funds dependency, secured versus unsecured funding sources, exposures to single providers of funds, exposures to funds providers by market segments, and different types of brokered deposits or wholesale funding. • Funding concentrations that address the term, re-pricing, and market characteristics of funding sources. This may include diversification targets for short-, medium- and long-term funding, instrument type and securitization vehicles, and guidance on 6 Financial instruments that are illiquid, difficult to value, marked by the presence of cash flows that are irregular, uncertain, or difficult to model. E:\FR\FM\06JYN1.SGM 06JYN1 mstockstill on PROD1PC66 with NOTICES 32040 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices concentrations for currencies and geographical markets. • Contingent liability exposures such as unfunded loan commitments, lines of credit supporting asset sales or securitizations, and collateral requirements for derivatives transactions and various types of secured lending. • Exposures of material activities, such as securitization, derivatives, trading, transaction processing, and international activities, to broad systemic and adverse financial market events. This is most applicable to institutions with complex and sophisticated liquidity risk profiles. 13. Policies also should specify the nature and frequency of management reporting. In normal business environments, senior managers should receive liquidity risk reports at least monthly, while the board of directors should receive liquidity risk reports at least quarterly. Depending upon the complexity of the institution’s business mix and liquidity risk profile, management reporting may need to be more frequent. Regardless of an institution’s complexity, it should have the ability to increase the frequency of reporting on short notice if the need arises. Liquidity risk reports should impart to senior management and the board a clear understanding of the institution’s liquidity risk exposure, compliance with risk limits, consistency between management’s strategies and tactics, and consistency between these strategies and the board’s expressed risk tolerance. 14. Institutions should consider liquidity costs, benefits, and risks in strategic planning and budgeting processes. Significant business activities should be evaluated for both liquidity risk exposure and profitability. More complex and sophisticated institutions should incorporate liquidity costs, benefits, and risks in the internal product pricing, performance measurement, and new product approval process for all material business lines, products and activities. Incorporating the cost of liquidity into these functions should align the risktaking incentives of individual business lines with the liquidity risk exposure their activities create for the institution as a whole. The quantification and attribution of liquidity risks should be explicit and transparent at the line management level and should include consideration of how liquidity would be affected under stressed conditions. VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 Liquidity Risk Measurement, Monitoring and Reporting 15. The process of measuring liquidity risk should include robust methods for comprehensively projecting cash flows arising from assets, liabilities, and offbalance-sheet items over an appropriate set of time horizons. Pro forma cash flow statements are a critical tool for adequately managing liquidity risk. Cash flow projections can range from simple spreadsheets to very detailed reports depending upon the complexity and sophistication of the institution and its liquidity risk profile under alternative scenarios. Given the critical importance that assumptions play in constructing measures of liquidity risk and projections of cash flows, institutions should ensure that the assumptions used are reasonable, appropriate, and adequately documented. Institutions should periodically review and formally approve these assumptions. Institutions should focus particular attention on the assumptions used in assessing the liquidity risk of complex assets, liabilities, and off-balance-sheet positions. Assumptions applied to positions with uncertain cash flows, including the stability of retail and brokered deposits and secondary market issuances and borrowings, are especially important when they are used to evaluate the availability of alternative sources of funds under adverse contingent liquidity scenarios. Such scenarios include, but are not limited to deterioration in the institution’s asset quality or capital adequacy. 16. Institutions should ensure that assets are properly valued according to relevant financial reporting and supervisory standards. An institution should fully factor into its risk management the consideration that valuations may deteriorate under market stress and take this into account in assessing the feasibility and impact of asset sales on its liquidity position during stress events. 17. Institutions should ensure that their vulnerabilities to changing liquidity needs and liquidity capacities are appropriately assessed within meaningful time horizons, including intraday, day-to-day, short-term weekly and monthly horizons, medium-term horizons of up to one year, and longerterm liquidity needs over one year. These assessments should include vulnerabilities to events, activities, and strategies that can significantly strain the capability to generate internal cash. PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 Stress Testing 18. Institutions should conduct stress tests on a regular basis for a variety of institution-specific and market-wide events across multiple time horizons. The magnitude and frequency of stress testing should be commensurate with the complexity of the financial institution and the level of its risk exposures. Stress test outcomes should be used to identify and quantify sources of potential liquidity strain and to analyze possible impacts on the institution’s cash flows, liquidity position, profitability, and solvency. Stress tests should also be used to ensure that current exposures are consistent with the financial institution’s established liquidity risk tolerance. Management’s active involvement and support is critical to the effectiveness of the stress testing process. Management should discuss the results of stress tests and take remedial or mitigating actions to limit the institution’s exposures, build up a liquidity cushion, and adjust its liquidity profile to fit its risk tolerance. The results of stress tests should also play a key role in shaping the institution’s contingency planning. As such, stress testing and contingency planning are closely intertwined. Collateral Position Management 19. An institution should have the ability to calculate all of its collateral positions in a timely manner, including assets currently pledged relative to the amount of security required and unencumbered assets available to be pledged. An institution’s level of available collateral should be monitored by legal entity, by jurisdiction and by currency exposure, and systems should be capable of monitoring shifts between intraday and overnight or term collateral usage. An institution should be aware of the operational and timing requirements associated with accessing the collateral given its physical location (i.e., the custodian institution or securities settlement system with which the collateral is held). Institutions should also fully understand the potential demand on required and available collateral arising from various types of contractual contingencies during periods of both market-wide and institution-specific stress. Management Reporting 20. Liquidity risk reports should provide aggregate information with sufficient supporting detail to enable management to assess the sensitivity of the institution to changes in market conditions, its own financial E:\FR\FM\06JYN1.SGM 06JYN1 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices performance, and other important risk factors. The types of reports or information and their timing will vary according to the complexity of the institution’s operations and risk profile. Reportable items may include but are not limited to cash flow gaps, cash flow projections, asset and funding concentrations, critical assumptions used in cash flow projections, key early warning or risk indicators, funding availability, status of contingent funding sources, or collateral usage. Institutions should also report on the use of and availability of government support, such as lending and guarantee programs, and implications on liquidity positions, particularly since these programs are generally temporary or reserved as a source for contingent funding. mstockstill on PROD1PC66 with NOTICES Liquidity Across Legal Entities, and Business Lines 21. An institution should actively monitor and control liquidity risk exposures and funding needs within and across legal entities and business lines, taking into account legal, regulatory, and operational limitations to the transferability of liquidity. Separately regulated entities will need to maintain liquidity commensurate with their own risk profiles on a standalone basis. 22. Regardless of its organizational structure, it is important that an institution actively monitor and control liquidity risks at the level of individual legal entities, and the group as a whole, incorporating processes that aggregate data across multiple systems in order to develop a group-wide view of liquidity risk exposures and identify constraints on the transfer of liquidity within the group. 23. Assumptions regarding the transferability of funds and collateral should be described in liquidity risk management plans. Intraday Liquidity Position Management 24. Intraday liquidity monitoring is an important component of the liquidity risk management process for institutions engaged in significant payment, settlement and clearing activities. An institution’s failure to manage intraday liquidity effectively, under normal and stressed conditions, could leave it unable to meet payment and settlement obligations in a timely manner, adversely affecting its own liquidity position and that of its counterparties. Among large, complex organizations, the interdependencies that exist among payment systems and the inability to meet certain critical payments has the potential to lead to systemic disruptions that can prevent the smooth functioning VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 of all payment systems and money markets. Therefore, institutions with material payment, settlement and clearing activities should actively manage their intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions. Senior management should develop and adopt an intraday liquidity strategy that allows the institution to: • Monitor and measure expected daily gross liquidity inflows and outflows. • Manage and mobilize collateral when necessary to obtain intraday credit. • Identify and prioritize time-specific and other critical obligations in order to meet them when expected. • Settle other less critical obligations as soon as possible. • Control credit to customers when necessary. • Ensure that liquidity planners understand the amounts of collateral and liquidity needed to perform payment system obligations when assessing the organization’s overall liquidity needs. Diversified Funding 25. An institution should establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers to promote effective diversification of funding sources. An institution should regularly gauge its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund raising capacity remain valid. 26. An institution should diversify available funding sources in the short-, medium- and long-term. Diversification targets should be part of the medium- to long-term funding plans and should be aligned with the budgeting and business planning process. Funding plans should take into account correlations between sources of funds and market conditions. Funding should also be diversified across a full range of retail as well as secured and unsecured wholesale sources of funds, consistent with the institution’s sophistication and complexity. Management should also consider the funding implications of any government programs or guarantees it utilizes. As with wholesale funding, the potential unavailability of government programs over the intermediate- and long-term should be fully considered in the PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 32041 development of liquidity risk management strategies, tactics, and risk tolerances. Funding diversification should be implemented using limits addressing counterparties, secured versus unsecured market funding, instrument type, securitization vehicle, and geographic market. In general, funding concentrations should be avoided. Undue over-reliance on any one source of funding is considered an unsafe and unsound practice. 27. An essential component of ensuring funding diversity is maintaining market access. Market access is critical for effective liquidity risk management, as it affects both the ability to raise new funds and to liquidate assets. Senior management should ensure that market access is being actively managed, monitored, and tested by the appropriate staff. Such efforts should be consistent with the institution’s liquidity risk profile and sources of funding. For example, access to the capital markets is an important consideration for most large complex institutions, whereas the availability of correspondent lines of credit and other sources of whole funds are critical for smaller, less complex institutions. 28. An institution needs to identify alternative sources of funding that strengthen its capacity to withstand a variety of severe institution-specific and market-wide liquidity shocks. Depending upon the nature, severity, and duration of the liquidity shock, potential sources of funding include, but are not limited to, the following: • Deposit growth. • Lengthening maturities of liabilities. • Issuance of debt instruments.7 • Sale of subsidiaries or lines of business. • Asset securitization. • Sale (either outright or through repurchase agreements) or pledging of liquid assets. • Drawing-down committed facilities. • Borrowing. Cushion of Liquid Assets 29. Liquid assets are an important source of both primary (operating liquidity) and secondary (contingent liquidity) funding at many institutions. Indeed, a critical component of an institution’s ability to effectively 7 Federally-insured credit unions can borrow funds (which includes issuing debt) as given in Section 106 of the Federal Credit Union Act (FCUA). Section 106 of the FCUA as well as § 741.2 of the NCUA Rules and Regulations establish specific limitations on the amount which can be borrowed. Federal Credit Unions can borrow from natural persons in accordance with the requirements of Part 701.38 of the NCUA Rules and Regulations. E:\FR\FM\06JYN1.SGM 06JYN1 32042 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices mstockstill on PROD1PC66 with NOTICES respond to potential liquidity stress is the availability of a cushion of highly liquid assets without legal, regulatory, or operational impediments (i.e., unencumbered) that can be sold or pledged to obtain funds in a range of stress scenarios. These assets should be held as insurance against a range of liquidity stress scenarios; including those that involve the loss or impairment of typically available unsecured and/or secured funding sources. The size of the cushion of such high-quality liquid assets should be supported by estimates of liquidity needs performed under an institution’s stress testing as well as aligned with the risk tolerance and risk profile of the institution. Management estimates of liquidity needs during periods of stress should incorporate both contractual and non-contractual cash flows, including the possibility of funds being withdrawn. Such estimates should also assume the inability to obtain unsecured funding as well as the loss or impairment of access to funds secured by assets other than the safest, most liquid assets. 30. Management should ensure that unencumbered, highly liquid assets are readily available and are not pledged to payment systems or clearing houses. The quality of unencumbered liquid assets is important as it will ensure accessibility during the time of most need. For example, an institution could utilize its holdings of high-quality U.S. Treasury securities, or similar instruments, and enter into repurchase agreements in response to the most severe stress scenarios. Contingency Funding Plan 8 31. All financial institutions, regardless of size and complexity, should have a formal CFP that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations. A CFP should delineate policies to manage a range of stress environments, establish clear lines of responsibility, and articulate clear implementation and escalation procedures. It should be regularly tested and updated to ensure that it is operationally sound. 32. Contingent liquidity events are unexpected situations or business conditions that may increase liquidity risk. The events may be institutionspecific or arise from external factors and may include: 8 Financial institutions that have had their liquidity supported by temporary government programs administered by the Department of the Treasury, Federal Reserve and/or FDIC should not base their liquidity strategies on the belief that such programs will remain in place indefinitely. VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 • The institution’s inability to fund asset growth. • The institution’s inability to renew or replace maturing funding liabilities. • Customers unexpectedly exercising options to withdraw deposits or exercise off-balance-sheet commitments. • Changes in market value and price volatility of various asset types. • Changes in economic conditions, market perception, or dislocations in the financial markets. • Disturbances in payment and settlement systems due to operational or local disasters. 33. Insured institutions should be prepared for the specific contingencies that will be applicable to them if they become less than Well Capitalized pursuant to Prompt Correction Action.9 Contingencies may include restricted rates paid for deposits, the need to seek approval from the FDIC/NCUA to accept brokered deposits, or the inability to accept any brokered deposits.10 34. A CFP provides a documented framework for managing unexpected liquidity situations. The objective of the CFP is to ensure that the institution’s sources of liquidity are sufficient to fund normal operating requirements under contingent events. A CFP also identifies alternative contingent liquidity resources 11 that can be employed under adverse liquidity circumstances. An institution’s CFP should be commensurate with its complexity, risk profile, and scope of operations. 35. Contingent liquidity events can range from high-probability/low-impact events to low-probability/high-impact events. Institutions should incorporate planning for high-probability/lowimpact liquidity risks into the day-today management of sources and uses of funds. Institutions can generally accomplish this by assessing possible 9 See 12 U.S.C. 1831o; 12 CFR Part 6 (OCC), 12 CFR Part 208, 12 CFR Part 308 (FDIC), and 12 CFR Part 565 (OTS) and 12 U.S.C. 1790d; 12 CFR Part 702 (NCUA). 10 Section 38 of the FDI Act (12 U.S.C. 1831o) requires insured depository institutions that are not well capitalized to receive approval prior to engaging in certain activities. Section 38 restricts or prohibits certain activities and requires an insured depository institution to submit a capital restoration plan when it becomes undercapitalized. Section 216 of the Federal Credit Union Act and § 702 of the NCUA Rules and Regulations establish the requirements and restrictions for Federally-insured credit unions under Prompt Corrective Action. For brokered, nonmember deposits, additional restrictions apply to Federal credit unions as given in §§ 701.32 and 742 of the NCUA Rules and Regulations. 11 There may be time constraints, sometimes lasting weeks, encountered in initially establishing lines with FRB and/or FHLB. As a result, financial institutions should plan to have these lines set up well in advance. PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 variations around expected cash flow projections and providing for adequate liquidity reserves and other means of raising funds in the normal course of business. In contrast, all financial institution CFPs will typically focus on events that, while relatively infrequent, could significantly impact the institution’s operations. A CFP should: • Identify Stress Events. Stress events are those that may have a significant impact on the institution’s liquidity given its specific balance-sheet structure, business lines, organizational structure, and other characteristics. Possible stress events may include deterioration in asset quality, changes in agency credit ratings, Prompt Corrective Action (PCA) and CAMELS 12 ratings downgrades, widening of credit default spreads, operating losses, declining financial institution equity prices, negative press coverage, or other events that may call into question an institution’s ability to meet its obligations. • Assess Levels of Severity and Timing. The CFP should delineate the various levels of stress severity that can occur during a contingent liquidity event and identify the different stages for each type of event. The events, stages, and severity levels identified should include temporary disruptions, as well as those that might be more intermediate term or longer-term. Institutions can use the different stages or levels of severity identified to design early-warning indicators, assess potential funding needs at various points in a developing crisis, and specify comprehensive action plans. • Assess Funding Sources and Needs. A critical element of the CFP is the quantitative projection and evaluation of expected funding needs and funding capacity during the stress event. This entails an analysis of the potential erosion in funding at alternative stages or severity levels of the stress event and the potential cash flow mismatches that may occur during the various stress levels. Management should base such analysis on realistic assessments of the behavior of funds providers during the event and incorporate alternative contingency funding sources. The analysis also should include all material on- and off-balance-sheet cash flows and their related effects. The result should be a realistic analysis of cash inflows, outflows, and funds availability at 12 Federally-insured credit unions are evaluated using the ‘‘CAMEL’’ rating system, which is substantially similar to the ‘‘CAMELS’’ system without the ‘‘S’’ component for rating Sensitivity to market risk. Information on NCUA’s rating system can be found in Letter to Credit Unions 07–CU–12, CAMEL Rating System. E:\FR\FM\06JYN1.SGM 06JYN1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices different time intervals during the potential liquidity stress event in order to measure the institution’s ability to fund operations. Common tools to assess funding mismatches include: Æ Liquidity gap analysis—A cash flow report that essentially represents a base case estimate of where funding surpluses and shortfalls will occur over various future timeframes. Æ Stress tests—A pro forma cash flow report with the ability to estimate future funding surpluses and shortfalls under various liquidity stress scenarios and the institution’s ability to fund expected asset growth projections or sustain an orderly liquidation of assets under various stress events. • Identify Potential Funding Sources. Because liquidity pressures may spread from one funding source to another during a significant liquidity event, institutions should identify alternative sources of liquidity and ensure ready access to contingent funding sources. In some cases, these funding sources may rarely be used in the normal course of business. Therefore, institutions should conduct advance planning and periodic testing to ensure that contingent funding sources are readily available when needed. • Establish Liquidity Event Management Processes. The CFP should provide for a reliable crisis management team and administrative structure, including realistic action plans used to execute the various elements of the plan for given levels of stress. Frequent communication and reporting among team members, the board of directors, and other affected managers optimize the effectiveness of a contingency plan during an adverse liquidity event by ensuring that business decisions are coordinated to minimize further disruptions to liquidity. Such events may also require the daily computation of regular liquidity risk reports and supplemental information. The CFP should provide for more frequent and more detailed reporting as the stress situation intensifies. • Establish a Monitoring Framework for Contingent Events. Institution management should monitor for potential liquidity stress events by using early-warning indicators and event triggers. The institution should tailor these indicators to its specific liquidity risk profile. The early recognition of potential events allows the institution to position itself into progressive states of readiness as the event evolves, while providing a framework to report or communicate within the institution and to outside parties. Early warning signals may include but are not limited to negative publicity concerning an asset VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 class owned by the institution, increased potential for deterioration in the institution’s financial condition, widening debt or credit default swap spreads, and increased concerns over the funding of off-balance-sheet items. 36. To mitigate the potential for reputation contagion, effective communication with counterparties, credit-rating agencies, and other stakeholders when liquidity problems arise is of vital importance. Smaller institutions that rarely interact with the media should have plans in place for how they will manage press inquiries that may arise during a liquidity event. In addition, group-wide contingency funding plans, liquidity cushions, and multiple sources of funding are mechanisms that may mitigate reputation concerns. 37. In addition to early warning indicators, institutions that issue public debt, utilize warehouse financing, securitize assets, or engage in material over-the-counter derivative transactions typically have exposure to event triggers embedded in the legal documentation governing these transactions. Institutions that rely upon brokered deposits should also incorporate PCArelated downgrade triggers into their CFPs since a change in PCA status could have a material bearing on the availability of this funding source. Contingent event triggers should be an integral part of the liquidity risk monitoring system. Institutions that originate loans for asset securitization programs pose heightened liquidity concerns due to the unexpected funding needs associated with an early amortization event or disruption of funding pipelines. Institutions that securitize assets should have liquidity contingency plans that address this potential unexpected funding requirement. 38. Institutions that rely upon secured funding sources also are subject to potentially higher margin or collateral requirements that may be triggered upon the deterioration of a specific portfolio of exposures or the overall financial condition of the institution. The ability of a financially stressed institution to meet calls for additional collateral should be considered in the CFP. Potential collateral values also should be subject to stress tests since devaluations or market uncertainty could reduce the amount of contingent funding that can be obtained from pledging a given asset. Additionally, triggering events should be understood and monitored by liquidity managers. 39. Institutions should test various elements of the CFP to assess their reliability under times of stress. PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 32043 Institutions that rarely use the type of funds they identify as standby sources of liquidity in a stress situation, such as the sale or securitization of loans, securities repurchase agreements, Federal Reserve discount window borrowing, or other sources of funds, should periodically test the operational elements of these sources to ensure that they work as anticipated. However, institutions should be aware that during real stress events, prior market access testing does not guarantee that these funding sources will remain available within the same timeframes and/or on the same terms. 40. Larger, more complex institutions can benefit by employing operational simulations to test communications, coordination, and decision-making involving managers with different responsibilities, in different geographic locations, or at different operating subsidiaries. Simulations or tests run late in the day can highlight specific problems such as difficulty in selling assets or borrowing new funds at a time when business in the capital markets may be less active. Internal Controls 41. An institution’s internal controls consist of procedures, approval processes, reconciliations, reviews, and other mechanisms designed to provide assurance that the institution manages liquidity risk consistent with boardapproved policy. Appropriate internal controls should address relevant elements of the risk management process, including adherence to policies and procedures, the adequacy of risk identification, risk measurement, reporting, and compliance with applicable rules and regulations. 42. Management should ensure that an independent party regularly reviews and evaluates the various components of the institution’s liquidity risk management process. These reviews should assess the extent to which the institution’s liquidity risk management complies with both supervisory guidance and industry sound practices taking into account the level of sophistication and complexity of the institution’s liquidity risk profile.13 Smaller, less-complex institutions may achieve independence by assigning this responsibility to the audit function or other qualified individuals independent of the risk management process. The 13 This includes the standards established in this interagency guidance as well as the supporting material each agency provides in its examination manuals and handbooks directed at their supervised institutions. Industry standards include those advanced by recognized industry associations and groups. E:\FR\FM\06JYN1.SGM 06JYN1 32044 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices independent review process should report key issues requiring attention including instances of noncompliance to the appropriate level of management for prompt corrective action consistent with approved policy. Holding Company—Liquidity Risk Management mstockstill on PROD1PC66 with NOTICES 43. Financial holding companies, bank holding companies, and savings and loan holding companies (collectively, ‘‘holding companies’’) should develop and maintain liquidity management processes and funding programs that are consistent with their complexity, risk profile, and scope of operations. Appropriate liquidity risk management is especially important for holding companies since liquidity difficulties can easily spread to subsidiary institutions, particularly in similarly named companies where customers do not always understand the legal distinctions between the holding company and the institution. For this reason, financial institutions must ensure that liquidity is adequate at all levels of the organization to fully accommodate funding needs in periods of stress. This includes legal entities on VerDate Nov<24>2008 17:06 Jul 02, 2009 Jkt 217001 a stand-alone basis as well as for the consolidated institution. 44. Liquidity risk management processes and funding programs should take into full account the institution’s lending, investment and other activities and should ensure that adequate liquidity is maintained at the parent holding company and each of its subsidiaries. These processes and programs should fully incorporate real and potential constraints on the transfer of funds among subsidiaries and between subsidiaries and the parent holding company, including legal and regulatory restrictions. Holding company liquidity should be maintained at levels sufficient to fund holding company and affiliate operations for an extended period of time in a stress environment, where access to normal funding sources are disrupted, without having a negative impact on insured depository institution subsidiaries. 45. More in-depth discussions of the specific considerations surrounding the principles of safe and sound liquidity risk management of holding companies, as well as legal and regulatory restrictions regarding the flow of funds between holding companies and their PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 subsidiaries are contained in the Federal Reserve’s Trading and Capital Markets Activities Manual and Bank Holding Company Supervision Manual and the Office of Thrift Supervision’s Holding Companies Handbook. Dated: June 16, 2009. John C. Dugan, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, June 29, 2009. Jennifer J. Johnson, Secretary of the Board. Dated at Washington, DC, the 23rd day of June, 2009. By order of the Federal Deposit Insurance Corporation. Valerie J. Best, Assistant Executive Secretary. Dated: June 10, 2009. By the Office of Thrift Supervision. John E. Bowman, Acting Director. Dated: February 11, 2009. By the National Credit Union Administration Board. Mary F. Rupp, Secretary of the Board. [FR Doc. E9–15800 Filed 7–2–09; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; 6720–01–P; 7535–01–P E:\FR\FM\06JYN1.SGM 06JYN1

Agencies

[Federal Register Volume 74, Number 127 (Monday, July 6, 2009)]
[Notices]
[Pages 32035-32044]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-15800]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2009-0009]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1362]

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2009-0011]

NATIONAL CREDIT UNION ADMINISTRATION


Proposed Interagency Guidance--Funding and Liquidity Risk 
Management

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (FRB); Federal Deposit 
Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury 
(OTS); and National Credit Union Administration (NCUA).

ACTION: Notice with request for comment.

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SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies) in 
conjunction with the Conference of State Bank Supervisors (CSBS), 
request comment on the proposed guidance on funding and liquidity risk 
management (proposed Guidance). The proposed Guidance summarizes the 
principles of sound liquidity risk management that the agencies have 
issued in the past and, where appropriate, brings them into conformance 
with the ``Principles for Sound Liquidity Risk Management and 
Supervision'' issued by the Basel Committee on Banking Supervision 
(BCBS) in September 2008. While the BCBS liquidity principles primarily 
focuses on large internationally active financial institutions, the 
proposed guidance emphasizes supervisory expectations for all domestic 
financial institutions including banks, thrifts and credit unions.

DATES: Comments must be submitted on or before September 4, 2009.

ADDRESSES: Comments should be directed to:
    OCC: Because paper mail in the Washington, DC area and at the 
Agencies is subject to delay, commenters are encouraged to submit 
comments by e-mail, if possible. Please use the title ``Proposed 
Interagency Guidance--Funding and Liquidity Risk Management'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     E-mail: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2009-0009'' in your comment. In general, OCC will enter 
all comments received into the docket without change, including any 
business or personal information that you provide such as name and 
address information, e-mail addresses, or phone numbers. Comments 
received, including attachments and other supporting materials, are 
part of the public record and subject to public disclosure. Do not 
enclose any information in your comment or supporting materials that 
you consider confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    FRB: You may submit comments, identified by Docket No. OP-1362, by 
any of the following methods:

[[Page 32036]]

     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: 202/452-3819 or 202/452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the FRB's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
unless modified for technical reasons. Accordingly, your comments will 
not be edited to remove any identifying or contact information. Public 
comments may also be viewed in electronic or paper form in Room MP-500 
of the FRB's Martin Building (20th and C Streets, NW.) between 9 a.m. 
and 5 p.m. on weekdays.
    FDIC: You may submit comments by any of the following methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web 
site.
     E-mail: Comments@FDIC.gov. Include ``Proposed Interagency 
Guidance--Funding and Liquidity Management Risk'' in the subject line 
of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m. (EST).
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Public Inspection: All comments received will be posted without 
change to http://www.fdic.gov/regulations/laws/federal, including any 
personal information provided. Comments may be inspected and 
photocopied in the FDIC Public Information Center, 3501 North Fairfax 
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m. 
(EST) on business days. Paper copies of public comments may be ordered 
from the Public Information Center by telephone at (877) 275-3342 or 
(703) 562-2200.
    OTS: You may submit comments, identified by OTS-2009-0011, by any 
of the following methods:
     E-mail address: regs.comments@ots.treas.gov. Please 
include ID OTS-2009-0011 in the subject line of the message and include 
your name and telephone number in the message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: ID OTS-2009-0011.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: ID OTS-2009-
0011.
    Instructions: All submissions received must include the agency name 
and docket number for this notice. All comments received will be posted 
to the OTS Internet Site at http://www.ots.treas.gov/Supervision&Legal.Laws&Regulations without change, including any 
personal information provided. Comments including attachments and other 
supporting materials received are part of the public record and subject 
to public disclosure. Do not enclose any information in your comments 
or supporting materials that you consider confidential or inappropriate 
for public disclosure.
     Viewing Comments On-Site: You may inspect comments at the 
Public Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.
    NCUA: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    NCUA Web Site: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the 
instructions for submitting comments.
     E-mail: Address to regcomments@ncua.gov. Include ``[Your 
name] Comments on Proposed Interagency Guidance--Funding and Liquidity 
Risk Management,'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary F. Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except 
as may not be possible for technical reasons. Public comments will not 
be edited to remove any identifying or contact information. Paper 
copies of comments may be inspected in NCUA's law library, at 1775 Duke 
Street, Alexandria, Virginia 22314, by appointment weekdays between 9 
a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an 
e-mail to OGC Mail @ncua.gov.

FOR FURTHER INFORMATION CONTACT: OCC: Kerri Corn, Director for Market 
Risk, Credit and Market Risk Division, (202) 874-5670 or J. Ray Diggs, 
Group Leader: Balance Sheet Management, Credit and Market Risk 
Division, (202) 874-5670.
    FRB: James Embersit, Deputy Associate Director, Market and 
Liquidity Risk, 202-452-5249 or Mary Arnett, Supervisory Financial 
Analyst, Market and Liquidity Risk, 202-721-4534 or Brendan Burke, 
Supervisory Financial Analyst, Supervisory Policy and Guidance, 202-
452-2987
    FDIC: Kyle Hadley, Chief Capital Markets Examination Support, (202) 
898-6532.
    OTS: Jeff Adams, Capital Markets Specialist, Risk Modeling and 
Analysis, (202) 906-6388 or Marvin Shaw, Senior Attorney, Regulations 
and Legislation Division, (202) 906-6639.
    NCUA: John Bilodeau, Program Officer, Examination and Insurance, 
(703) 518-6618.

SUPPLEMENTARY INFORMATION:

I. Background

    The recent turmoil in the financial markets emphasizes the 
importance of good liquidity risk management to the safety and 
soundness of financial institutions. Supervisors worked on an 
international and national level through various groups (e.g., Basel 
Committee on Banking Supervision, Senior Supervisors Group, Financial 
Stability Forum) to assess the implications from the current market 
conditions on an institution's assessment of liquidity risk and the 
supervisor's approach to liquidity risk supervision. The industry

[[Page 32037]]

through the Institute of International Finance (IIF) also performed 
work in the area of liquidity risk and issued guidelines in 2008. 
Additionally, supervisors in Europe and Asia have also worked on 
domestic liquidity guidance. This guidance focuses on all domestic 
financial institutions, including banks, thrifts, and credit unions. 
The proposed guidance emphasizes the key elements of liquidity risk 
management already addressed separately by the agencies, and provides 
consistent interagency expectations on sound practices for managing 
funding and liquidity risk.

II. Request for Comment

    The agencies request comments on all aspects of the proposed 
guidance.

III. Paperwork Reduction Act

    In accordance with section 3512 of the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501-3521 (PRA), the Agencies may not conduct or 
sponsor, and the respondent is not required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number.
    Comments are invited on:
    (a) Whether the collection of information is necessary for the 
proper performance of the Federal banking agencies' functions, 
including whether the information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collection, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments should 
be addressed to:
    OCC: Please follow the instructions found in the ADDRESSES caption 
above for submitting comments.
    FRB: Please follow the instructions found in the ADDRESSES caption 
above for submitting comments.
    FDIC: Interested parties are invited to submit written comments to 
the FDIC by any of the following methods. All comments should refer to 
the name of the collection:
     http://www.FDIC.gov/regulations/laws/federal/notices.html
     E-mail: comments@fdic.gov Include the name of the 
collection in the subject line of the message.
     Mail: Leneta G. Gregorie (202-898-3719), Counsel, Room F-
1064, Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.
     Hand Delivery: Comments may be hand-delivered to the guard 
station at the rear of the 17th Street Building (located on F Street), 
on business days between 7 a.m. and 5 p.m.
    OTS: Please follow the instructions found in the ADDRESSES caption 
above for submitting comments.
    NCUA: Please follow the instructions found in the ADDRESSES caption 
above for submitting comments.
    All Agencies: A copy of the comments may also be submitted to the 
OMB desk officer for the Agencies: Office of Information and Regulatory 
Affairs, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503.
    Title of Information Collection: Funding and Liquidity Risk 
Management.
    OMB Control Numbers: New collection; to be assigned by OMB.
    Abstract: Section 14 states that institutions should consider 
liquidity costs, benefits, and risks in strategic planning and 
budgeting processes. Significant business activities should be 
evaluated for liquidity risk exposure as well as profitability. More 
complex and sophisticated institutions should incorporate liquidity 
costs, benefits, and risks in the internal product pricing, performance 
measurement, and new product approval process for all material business 
lines, products and activities. Incorporating the cost of liquidity 
into these functions should align the risk-taking incentives of 
individual business lines with the liquidity risk exposure their 
activities create for the institution as a whole. The quantification 
and attribution of liquidity risks should be explicit and transparent 
at the line management level and should include consideration of how 
liquidity would be affected under stressed conditions.
    Section 20 would require that liquidity risk reports provide 
aggregate information with sufficient supporting detail to enable 
management to assess the sensitivity of the institution to changes in 
market conditions, its own financial performance, and other important 
risk factors. Institutions should also report on the use of and 
availability of government support, such as lending and guarantee 
programs, and implications on liquidity positions, particularly since 
these programs are generally temporary or reserved as a source for 
contingent funding.
    Affected Public:
    OCC: National banks, their subsidiaries, and Federal branches or 
agencies of foreign banks.
    FRB: Bank holding companies and state member banks.
    FDIC: Insured state nonmember banks.
    OTS: Federal savings associations and their affiliated holding 
companies.
    NCUA: Federally-insured credit unions.
    Type of Review: Regular.
    Estimated Burden:
    OCC:
    Number of respondents: 1,560 total (13 large (over $100 billion in 
assets), 29 mid-size ($10-$100 billion), 1,518 small (less than $10 
billion)).
    Burden under Section 14: 720 hours per large respondent, 240 hours 
per mid-size respondent, and 80 hours per small respondent.
    Burden under Section 20: 4 hours per month.
    Total estimated annual burden: 212,640 hours.
    FRB:
    Number of respondents: 5,892 total (26 large (over $100 billion in 
assets), 71 mid-size ($10-$100 billion), 5,795 small (less than $10 
billion)).
    Burden under Section 14: 720 hours per large respondent, 240 hours 
per mid-size respondent, and 80 hours per small respondent.
    Burden under Section 20: 4 hours per month.
    Total estimated annual burden: 782,176 hours.
    FDIC:
    Number of respondents: 5,076 total (10 large (over $20 billion in 
assets), 309 mid-size ($1-$20 billion), 4,757 small (less than $1 
billion)).
    Burden under Section 14: 720 hours per large respondent, 240 hours 
per mid-size respondent, and 80 hours per small respondent.
    Burden under Section 20: 4 hours per month.
    Total estimated annual burden: 705,564.
    OTS:
    Number of respondents: 801 total (14 large (over $100 billion in 
assets), 104 mid-size ($10-$100 billion), 683 small (less than $10 
billion)).
    Burden under Section 14: 720 hours per large respondent, 240 hours 
per mid-size respondent, and 80 hours per small respondent.
    Burden under Section 20: 4 hours per month.
    Total estimated annual burden: 128,128.
    NCUA:

[[Page 32038]]

    Number of respondents: 7,736 total (153 large (over $1 billion in 
assets), 501 mid-size ($250 million to $1 billion), and 7,082 small 
(less than $250 million)).
    Burden under Section 14: 240 hours per large respondent, 80 hours 
per mid-size respondent, and 20 hours per small respondent.
    Burden under Section 20: 2 hours per month.
    Total estimated annual burden: 404,104.

IV. Guidance

    The text of the proposed Guidance on Funding and Liquidity Risk 
Management is as follows:

Interagency Guidance on Funding and Liquidity Risk Management

    1. The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (FRB), Federal Deposit 
Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), 
and the National Credit Union Administration (NCUA) (collectively, 
``the agencies'') in conjunction with the Conference of State Bank 
Supervisors (CSBS) \1\ are issuing this guidance to provide consistent 
interagency expectations on sound practices for managing funding and 
liquidity risk. The guidance summarizes the principles of sound 
liquidity risk management that the agencies have issued in the past \2\ 
and, where appropriate, brings these principles into conformance with 
the international guidance recently issued by the Basel Committee on 
Banking Supervision titled ``Principles for Sound Liquidity Risk 
Management and Supervision.\3\
---------------------------------------------------------------------------

    \1\ The various state banking supervisors may implement this 
policy statement through their individual supervisory process.
    \2\ For national banks, see the Comptroller's Handbook on 
Liquidity. For state member banks and bank holding companies, see 
the Federal Reserve's Commercial Bank Examination Manual (section 
4020), Bank Holding Company Supervision Manual (section 4010), and 
Trading and Capital Markets Activities Manual (section 2030). For 
State non-member banks, see the FDIC's Revised Examination Guidance 
for Liquidity and Funds Management (Trans. No. 2002-01) (Nov. 19, 
2001) as well as Financial Institution Letter 84-2008, Liquidity 
Risk Management (August 2008). For savings associations, see the 
Office of Thrift Supervision's Examination Handbook, section 530, 
``Cash Flow and Liquidity Management''; and the Holding Companies 
Handbook, section 600. For credit unions, see Letter to Credit 
Unions No. 02-CU-05, Examination Program Liquidity Questionnaire 
(March 2002). Also see Basel Committee on Banking Supervision, 
``Principles for Sound Liquidity Risk Management and Supervision,'' 
(September 2008).
    \3\ Basel Committee on Banking Supervision, ``Principles for 
Sound Liquidity Risk Management and Supervision'', September 2008. 
See http://www.bis.org/publ/bcbs144.htm. Federally-insured credit 
unions are not subject to principles issued by the Basel Committee.
---------------------------------------------------------------------------

    2. Recent events illustrate that liquidity risk management at many 
financial institutions is in need of improvement. Deficiencies include 
insufficient holdings of liquid assets, funding risky or illiquid asset 
portfolios with potentially volatile short-term liabilities, and a lack 
of meaningful cash flow projections and liquidity contingency plans.
    3. The following guidance reiterates the process that institutions 
should follow to appropriately identify, measure, monitor and control 
their funding and liquidity risk. In particular, the guidance re-
emphasizes the importance of cash flow projections, diversified funding 
sources, stress testing, a cushion of liquid assets, and a formal well-
developed contingency funding plan (CFP) as primary tools for measuring 
and managing liquidity risk. The agencies expect all financial 
institutions \4\ to manage liquidity risk using processes and systems 
that are commensurate with the institution's complexity, risk profile, 
and scope of operations. Liquidity risk management processes and plans 
should be well documented and available for supervisory review. Failure 
to maintain an adequate liquidity risk management process is considered 
an unsafe and unsound practice.
---------------------------------------------------------------------------

    \4\ Unless otherwise indicated, this interagency guidance uses 
the term ``financial institutions'' or ``institutions'' to include 
banks, saving associations, credit unions, and affiliated holding 
companies. Federally-insured credit unions (FICUs) do not have 
holding company affiliations and therefore references to holding 
companies contained within this guidance are not applicable to 
FICUs.
---------------------------------------------------------------------------

Liquidity and Liquidity Risk

    4. Liquidity is a financial institution's capacity to meet its cash 
and collateral obligations at a reasonable cost. Maintaining an 
adequate level of liquidity depends on the institution's ability to 
efficiently meet both expected and unexpected cash flows and collateral 
needs without adversely affecting either daily operations or the 
financial condition of the institution.
    5. Liquidity risk is the risk that an institution's financial 
condition or overall safety and soundness is adversely affected by an 
inability (or perceived inability) to meet its contractual obligations. 
An institution's obligations and the funding sources used to meet them 
depend significantly on its business mix, balance-sheet structure, and 
the cash-flow profiles of its on- and off-balance-sheet obligations. In 
managing their cash flows, institutions confront various situations 
that can give rise to increased liquidity risk. These include funding 
mismatches, market constraints on the ability to convert assets into 
cash or in accessing sources of funds (i.e., market liquidity), and 
contingent liquidity events. Changes in economic conditions or exposure 
to credit, market, operation, legal, and reputation risks also can 
affect an institution's liquidity risk profile and should be considered 
in the assessment of liquidity and asset/liability management.

Sound Practices of Liquidity Risk Management

    6. An institution's liquidity management process should be 
sufficient to meet its daily funding needs, and cover both expected and 
unexpected deviations from normal operations. Accordingly, institutions 
should have a comprehensive management process for identifying, 
measuring, monitoring and controlling liquidity risk. Because of the 
critical importance to the viability of the institution, liquidity risk 
management should be fully integrated into the institution's risk 
management processes. Critical elements of sound liquidity risk 
management include:
     Effective corporate governance consisting of oversight by 
the board of directors and active involvement by management in an 
institution's control of liquidity risk.
     Appropriate strategies, policies, procedures, and limits 
used to manage and mitigate liquidity risk.
     Comprehensive liquidity risk measurement and monitoring 
systems (including assessments of the current and prospective cash 
flows or sources and uses of funds) that are commensurate with the 
complexity and business activities of the institution.
     Active management of intraday liquidity and collateral.
     An appropriately diverse mix of existing and potential 
future funding sources.
     Adequate levels of highly liquid marketable securities 
free of legal, regulatory, or operational impediments that can be used 
to meet liquidity needs in stressful situations.
     Comprehensive contingency funding plans (CFPs) that 
sufficiently address potential adverse liquidity events and emergency 
cash flow requirements.
     Internal controls and internal audit processes sufficient 
to determine the adequacy of the institution's liquidity risk 
management process.
    Supervisors will assess these critical elements in their reviews of 
an institution's liquidity risk management

[[Page 32039]]

process in relation to its size, complexity, and scope of operations.

Corporate Governance

    7. The board of directors is ultimately responsible for the 
liquidity risk assumed by the institution. As a result, the board 
should ensure that the institution's liquidity risk tolerance is 
established and communicated in such a manner that all levels of 
management clearly understand the institution's approach to managing 
the trade-offs between liquidity risk and profits. The board of 
directors or its delegated committee of board members should oversee 
the establishment and approval of liquidity management strategies, 
policies and procedures, and review them at least annually. In 
addition, the board should ensure that it:
     Understands the nature of the liquidity risks of its 
institution and periodically reviews information necessary to maintain 
this understanding.
     Establishes executive-level lines of authority and 
responsibility for managing the institution's liquidity risk.
     Enforces management's duties to identify, measure, 
monitor, and control liquidity risk.
     Understands and periodically reviews the institution's 
CFPs for handling potential adverse liquidity events.
     Comprehends the liquidity risk profiles of important 
subsidiaries and affiliates as appropriate.
    8. Senior management is responsible for ensuring that board-
approved strategies, policies, and procedures for managing liquidity 
(on both a long-term and day-to-day basis) are appropriately executed 
within the lines of authority and responsibility designated for 
managing and controlling liquidity risk. This includes overseeing the 
development and implementation of appropriate risk measurement and 
reporting systems, liquid buffers of unencumbered marketable 
securities, CFPs, and an adequate internal control infrastructure. 
Senior management is also responsible for regularly reporting to the 
board of directors on the liquidity risk profile of the institution.
    9. Senior management should determine the structure, 
responsibilities, and controls for managing liquidity risk and for 
overseeing the liquidity positions of the institution. These elements 
should be clearly documented in liquidity risk policies and procedures. 
For institutions comprised of multiple entities, such elements should 
be fully specified and documented in policies for each material legal 
entity and subsidiary. Senior management should be able to monitor 
liquidity risks for each entity across the institution on an ongoing 
basis. Processes should be in place to ensure that the group's senior 
management is actively monitoring and quickly responding to all 
material developments, and reporting to the board of directors as 
appropriate.
    10. Institutions should clearly identify the individuals or 
committees responsible for implementing and making liquidity risk 
decisions. When an institution uses an asset/liability committee (ALCO) 
or other similar senior management committee, the committee should 
actively monitor the institution's liquidity profile and should have 
sufficiently broad representation across major institutional functions 
that can directly or indirectly influence the institution's liquidity 
risk profile (e.g., lending, investment securities, wholesale and 
retail funding, etc.). Committee members should include senior managers 
with authority over the units responsible for executing liquidity-
related transactions and other activities within the liquidity risk 
management process. In addition, the committee should ensure that the 
risk measurement system adequately identifies and quantifies risk 
exposure. The committee also should ensure that the reporting process 
communicates accurate, timely, and relevant information about the level 
and sources of risk exposure.

Strategies, Policies, Procedures, and Risk Tolerances

    11. Institutions should have documented strategies for managing 
liquidity risk and clear policies and procedures for limiting and 
controlling risk exposures that appropriately reflect the institution's 
risk tolerances. Strategies should identify primary sources of funding 
for meeting daily operating cash outflows, as well as seasonal and 
cyclical cash flow fluctuations. Strategies should also address 
alternative responses to various adverse business scenarios.\5\ 
Policies and procedures should provide for the formulation of plans and 
courses of actions for dealing with potential temporary, intermediate-
term, and long-term liquidity disruptions. Policies, procedures, and 
limits also should address liquidity separately for individual 
currencies, legal entities, and business lines, when appropriate and 
material, as well as allow for legal, regulatory, and operational 
limits for the transferability of liquidity. Senior management should 
coordinate the institution's liquidity risk management with disaster, 
contingency, and strategic planning efforts, as well as with business 
line and risk management objectives, strategies, and tactics.
---------------------------------------------------------------------------

    \5\ In formulating liquidity management strategies, members of 
complex banking groups should take into consideration their legal 
structures (branches versus separate legal entities and operating 
subsidiaries), key business lines, markets, products, and 
jurisdictions in which they operate.
---------------------------------------------------------------------------

    12. Policies should clearly articulate a liquidity risk tolerance 
that is appropriate for the business strategy of the institution 
considering its complexity, business mix, liquidity risk profile, and 
its role in the financial system. Policies should also contain 
provisions for documenting and periodically reviewing assumptions used 
in liquidity projections. Policy guidelines should employ both 
quantitative targets and qualitative guidelines. These measurements, 
limits, and guidelines may be specified in terms of the following 
measures and conditions, as applicable:
     Cash flow projections that include discrete and cumulative 
cash flow mismatches or gaps over specified future time horizons under 
both expected and adverse business conditions.
     Target amounts of unpledged liquid asset reserves.
     Measures used to identify volatile liability dependence 
and liquid asset coverage ratios. For example, these may include ratios 
of wholesale funding to total liabilities, potentially volatile retail 
(e.g., high-cost or out-of-market) deposits to total deposits, and 
other liability dependency measures, such as short-term borrowings as a 
percent of total funding.
     Asset concentrations that could increase liquidity risk 
through a limited ability to convert to cash (e.g., complex financial 
instruments,\6\ bank-owned (corporate-owned) life insurance, and less 
marketable loan portfolios).
---------------------------------------------------------------------------

    \6\ Financial instruments that are illiquid, difficult to value, 
marked by the presence of cash flows that are irregular, uncertain, 
or difficult to model.
---------------------------------------------------------------------------

     Funding concentrations that address diversification of 
funding sources and types, such as large liability and borrowed funds 
dependency, secured versus unsecured funding sources, exposures to 
single providers of funds, exposures to funds providers by market 
segments, and different types of brokered deposits or wholesale 
funding.
     Funding concentrations that address the term, re-pricing, 
and market characteristics of funding sources. This may include 
diversification targets for short-, medium- and long-term funding, 
instrument type and securitization vehicles, and guidance on

[[Page 32040]]

concentrations for currencies and geographical markets.
     Contingent liability exposures such as unfunded loan 
commitments, lines of credit supporting asset sales or securitizations, 
and collateral requirements for derivatives transactions and various 
types of secured lending.
     Exposures of material activities, such as securitization, 
derivatives, trading, transaction processing, and international 
activities, to broad systemic and adverse financial market events. This 
is most applicable to institutions with complex and sophisticated 
liquidity risk profiles.
    13. Policies also should specify the nature and frequency of 
management reporting. In normal business environments, senior managers 
should receive liquidity risk reports at least monthly, while the board 
of directors should receive liquidity risk reports at least quarterly. 
Depending upon the complexity of the institution's business mix and 
liquidity risk profile, management reporting may need to be more 
frequent. Regardless of an institution's complexity, it should have the 
ability to increase the frequency of reporting on short notice if the 
need arises. Liquidity risk reports should impart to senior management 
and the board a clear understanding of the institution's liquidity risk 
exposure, compliance with risk limits, consistency between management's 
strategies and tactics, and consistency between these strategies and 
the board's expressed risk tolerance.
    14. Institutions should consider liquidity costs, benefits, and 
risks in strategic planning and budgeting processes. Significant 
business activities should be evaluated for both liquidity risk 
exposure and profitability. More complex and sophisticated institutions 
should incorporate liquidity costs, benefits, and risks in the internal 
product pricing, performance measurement, and new product approval 
process for all material business lines, products and activities. 
Incorporating the cost of liquidity into these functions should align 
the risk-taking incentives of individual business lines with the 
liquidity risk exposure their activities create for the institution as 
a whole. The quantification and attribution of liquidity risks should 
be explicit and transparent at the line management level and should 
include consideration of how liquidity would be affected under stressed 
conditions.

Liquidity Risk Measurement, Monitoring and Reporting

    15. The process of measuring liquidity risk should include robust 
methods for comprehensively projecting cash flows arising from assets, 
liabilities, and off-balance-sheet items over an appropriate set of 
time horizons. Pro forma cash flow statements are a critical tool for 
adequately managing liquidity risk. Cash flow projections can range 
from simple spreadsheets to very detailed reports depending upon the 
complexity and sophistication of the institution and its liquidity risk 
profile under alternative scenarios. Given the critical importance that 
assumptions play in constructing measures of liquidity risk and 
projections of cash flows, institutions should ensure that the 
assumptions used are reasonable, appropriate, and adequately 
documented. Institutions should periodically review and formally 
approve these assumptions. Institutions should focus particular 
attention on the assumptions used in assessing the liquidity risk of 
complex assets, liabilities, and off-balance-sheet positions. 
Assumptions applied to positions with uncertain cash flows, including 
the stability of retail and brokered deposits and secondary market 
issuances and borrowings, are especially important when they are used 
to evaluate the availability of alternative sources of funds under 
adverse contingent liquidity scenarios. Such scenarios include, but are 
not limited to deterioration in the institution's asset quality or 
capital adequacy.
    16. Institutions should ensure that assets are properly valued 
according to relevant financial reporting and supervisory standards. An 
institution should fully factor into its risk management the 
consideration that valuations may deteriorate under market stress and 
take this into account in assessing the feasibility and impact of asset 
sales on its liquidity position during stress events.
    17. Institutions should ensure that their vulnerabilities to 
changing liquidity needs and liquidity capacities are appropriately 
assessed within meaningful time horizons, including intraday, day-to-
day, short-term weekly and monthly horizons, medium-term horizons of up 
to one year, and longer-term liquidity needs over one year. These 
assessments should include vulnerabilities to events, activities, and 
strategies that can significantly strain the capability to generate 
internal cash.

Stress Testing

    18. Institutions should conduct stress tests on a regular basis for 
a variety of institution-specific and market-wide events across 
multiple time horizons. The magnitude and frequency of stress testing 
should be commensurate with the complexity of the financial institution 
and the level of its risk exposures. Stress test outcomes should be 
used to identify and quantify sources of potential liquidity strain and 
to analyze possible impacts on the institution's cash flows, liquidity 
position, profitability, and solvency. Stress tests should also be used 
to ensure that current exposures are consistent with the financial 
institution's established liquidity risk tolerance. Management's active 
involvement and support is critical to the effectiveness of the stress 
testing process. Management should discuss the results of stress tests 
and take remedial or mitigating actions to limit the institution's 
exposures, build up a liquidity cushion, and adjust its liquidity 
profile to fit its risk tolerance. The results of stress tests should 
also play a key role in shaping the institution's contingency planning. 
As such, stress testing and contingency planning are closely 
intertwined.

Collateral Position Management

    19. An institution should have the ability to calculate all of its 
collateral positions in a timely manner, including assets currently 
pledged relative to the amount of security required and unencumbered 
assets available to be pledged. An institution's level of available 
collateral should be monitored by legal entity, by jurisdiction and by 
currency exposure, and systems should be capable of monitoring shifts 
between intraday and overnight or term collateral usage. An institution 
should be aware of the operational and timing requirements associated 
with accessing the collateral given its physical location (i.e., the 
custodian institution or securities settlement system with which the 
collateral is held). Institutions should also fully understand the 
potential demand on required and available collateral arising from 
various types of contractual contingencies during periods of both 
market-wide and institution-specific stress.

Management Reporting

    20. Liquidity risk reports should provide aggregate information 
with sufficient supporting detail to enable management to assess the 
sensitivity of the institution to changes in market conditions, its own 
financial

[[Page 32041]]

performance, and other important risk factors. The types of reports or 
information and their timing will vary according to the complexity of 
the institution's operations and risk profile. Reportable items may 
include but are not limited to cash flow gaps, cash flow projections, 
asset and funding concentrations, critical assumptions used in cash 
flow projections, key early warning or risk indicators, funding 
availability, status of contingent funding sources, or collateral 
usage. Institutions should also report on the use of and availability 
of government support, such as lending and guarantee programs, and 
implications on liquidity positions, particularly since these programs 
are generally temporary or reserved as a source for contingent funding.

Liquidity Across Legal Entities, and Business Lines

    21. An institution should actively monitor and control liquidity 
risk exposures and funding needs within and across legal entities and 
business lines, taking into account legal, regulatory, and operational 
limitations to the transferability of liquidity. Separately regulated 
entities will need to maintain liquidity commensurate with their own 
risk profiles on a stand-alone basis.
    22. Regardless of its organizational structure, it is important 
that an institution actively monitor and control liquidity risks at the 
level of individual legal entities, and the group as a whole, 
incorporating processes that aggregate data across multiple systems in 
order to develop a group-wide view of liquidity risk exposures and 
identify constraints on the transfer of liquidity within the group.
    23. Assumptions regarding the transferability of funds and 
collateral should be described in liquidity risk management plans.

Intraday Liquidity Position Management

    24. Intraday liquidity monitoring is an important component of the 
liquidity risk management process for institutions engaged in 
significant payment, settlement and clearing activities. An 
institution's failure to manage intraday liquidity effectively, under 
normal and stressed conditions, could leave it unable to meet payment 
and settlement obligations in a timely manner, adversely affecting its 
own liquidity position and that of its counterparties. Among large, 
complex organizations, the interdependencies that exist among payment 
systems and the inability to meet certain critical payments has the 
potential to lead to systemic disruptions that can prevent the smooth 
functioning of all payment systems and money markets. Therefore, 
institutions with material payment, settlement and clearing activities 
should actively manage their intraday liquidity positions and risks to 
meet payment and settlement obligations on a timely basis under both 
normal and stressed conditions. Senior management should develop and 
adopt an intraday liquidity strategy that allows the institution to:
     Monitor and measure expected daily gross liquidity inflows 
and outflows.
     Manage and mobilize collateral when necessary to obtain 
intraday credit.
     Identify and prioritize time-specific and other critical 
obligations in order to meet them when expected.
     Settle other less critical obligations as soon as 
possible.
     Control credit to customers when necessary.
     Ensure that liquidity planners understand the amounts of 
collateral and liquidity needed to perform payment system obligations 
when assessing the organization's overall liquidity needs.

Diversified Funding

    25. An institution should establish a funding strategy that 
provides effective diversification in the sources and tenor of funding. 
It should maintain an ongoing presence in its chosen funding markets 
and strong relationships with funds providers to promote effective 
diversification of funding sources. An institution should regularly 
gauge its capacity to raise funds quickly from each source. It should 
identify the main factors that affect its ability to raise funds and 
monitor those factors closely to ensure that estimates of fund raising 
capacity remain valid.
    26. An institution should diversify available funding sources in 
the short-, medium- and long-term. Diversification targets should be 
part of the medium- to long-term funding plans and should be aligned 
with the budgeting and business planning process. Funding plans should 
take into account correlations between sources of funds and market 
conditions. Funding should also be diversified across a full range of 
retail as well as secured and unsecured wholesale sources of funds, 
consistent with the institution's sophistication and complexity. 
Management should also consider the funding implications of any 
government programs or guarantees it utilizes. As with wholesale 
funding, the potential unavailability of government programs over the 
intermediate- and long-term should be fully considered in the 
development of liquidity risk management strategies, tactics, and risk 
tolerances. Funding diversification should be implemented using limits 
addressing counterparties, secured versus unsecured market funding, 
instrument type, securitization vehicle, and geographic market. In 
general, funding concentrations should be avoided. Undue over-reliance 
on any one source of funding is considered an unsafe and unsound 
practice.
    27. An essential component of ensuring funding diversity is 
maintaining market access. Market access is critical for effective 
liquidity risk management, as it affects both the ability to raise new 
funds and to liquidate assets. Senior management should ensure that 
market access is being actively managed, monitored, and tested by the 
appropriate staff. Such efforts should be consistent with the 
institution's liquidity risk profile and sources of funding. For 
example, access to the capital markets is an important consideration 
for most large complex institutions, whereas the availability of 
correspondent lines of credit and other sources of whole funds are 
critical for smaller, less complex institutions.
    28. An institution needs to identify alternative sources of funding 
that strengthen its capacity to withstand a variety of severe 
institution-specific and market-wide liquidity shocks. Depending upon 
the nature, severity, and duration of the liquidity shock, potential 
sources of funding include, but are not limited to, the following:
     Deposit growth.
     Lengthening maturities of liabilities.
     Issuance of debt instruments.\7\
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    \7\ Federally-insured credit unions can borrow funds (which 
includes issuing debt) as given in Section 106 of the Federal Credit 
Union Act (FCUA). Section 106 of the FCUA as well as Sec.  741.2 of 
the NCUA Rules and Regulations establish specific limitations on the 
amount which can be borrowed. Federal Credit Unions can borrow from 
natural persons in accordance with the requirements of Part 701.38 
of the NCUA Rules and Regulations.
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     Sale of subsidiaries or lines of business.
     Asset securitization.
     Sale (either outright or through repurchase agreements) or 
pledging of liquid assets.
     Drawing-down committed facilities.
     Borrowing.

Cushion of Liquid Assets

    29. Liquid assets are an important source of both primary 
(operating liquidity) and secondary (contingent liquidity) funding at 
many institutions. Indeed, a critical component of an institution's 
ability to effectively

[[Page 32042]]

respond to potential liquidity stress is the availability of a cushion 
of highly liquid assets without legal, regulatory, or operational 
impediments (i.e., unencumbered) that can be sold or pledged to obtain 
funds in a range of stress scenarios. These assets should be held as 
insurance against a range of liquidity stress scenarios; including 
those that involve the loss or impairment of typically available 
unsecured and/or secured funding sources. The size of the cushion of 
such high-quality liquid assets should be supported by estimates of 
liquidity needs performed under an institution's stress testing as well 
as aligned with the risk tolerance and risk profile of the institution. 
Management estimates of liquidity needs during periods of stress should 
incorporate both contractual and non-contractual cash flows, including 
the possibility of funds being withdrawn. Such estimates should also 
assume the inability to obtain unsecured funding as well as the loss or 
impairment of access to funds secured by assets other than the safest, 
most liquid assets.
    30. Management should ensure that unencumbered, highly liquid 
assets are readily available and are not pledged to payment systems or 
clearing houses. The quality of unencumbered liquid assets is important 
as it will ensure accessibility during the time of most need. For 
example, an institution could utilize its holdings of high-quality U.S. 
Treasury securities, or similar instruments, and enter into repurchase 
agreements in response to the most severe stress scenarios.

Contingency Funding Plan \8\
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    \8\ Financial institutions that have had their liquidity 
supported by temporary government programs administered by the 
Department of the Treasury, Federal Reserve and/or FDIC should not 
base their liquidity strategies on the belief that such programs 
will remain in place indefinitely.
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    31. All financial institutions, regardless of size and complexity, 
should have a formal CFP that clearly sets out the strategies for 
addressing liquidity shortfalls in emergency situations. A CFP should 
delineate policies to manage a range of stress environments, establish 
clear lines of responsibility, and articulate clear implementation and 
escalation procedures. It should be regularly tested and updated to 
ensure that it is operationally sound.
    32. Contingent liquidity events are unexpected situations or 
business conditions that may increase liquidity risk. The events may be 
institution-specific or arise from external factors and may include:
     The institution's inability to fund asset growth.
     The institution's inability to renew or replace maturing 
funding liabilities.
     Customers unexpectedly exercising options to withdraw 
deposits or exercise off-balance-sheet commitments.
     Changes in market value and price volatility of various 
asset types.
     Changes in economic conditions, market perception, or 
dislocations in the financial markets.
     Disturbances in payment and settlement systems due to 
operational or local disasters.
    33. Insured institutions should be prepared for the specific 
contingencies that will be applicable to them if they become less than 
Well Capitalized pursuant to Prompt Correction Action.\9\ Contingencies 
may include restricted rates paid for deposits, the need to seek 
approval from the FDIC/NCUA to accept brokered deposits, or the 
inability to accept any brokered deposits.\10\
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    \9\ See 12 U.S.C. 1831o; 12 CFR Part 6 (OCC), 12 CFR Part 208, 
12 CFR Part 308 (FDIC), and 12 CFR Part 565 (OTS) and 12 U.S.C. 
1790d; 12 CFR Part 702 (NCUA).
    \10\ Section 38 of the FDI Act (12 U.S.C. 1831o) requires 
insured depository institutions that are not well capitalized to 
receive approval prior to engaging in certain activities. Section 38 
restricts or prohibits certain activities and requires an insured 
depository institution to submit a capital restoration plan when it 
becomes undercapitalized. Section 216 of the Federal Credit Union 
Act and Sec.  702 of the NCUA Rules and Regulations establish the 
requirements and restrictions for Federally-insured credit unions 
under Prompt Corrective Action. For brokered, nonmember deposits, 
additional restrictions apply to Federal credit unions as given in 
Sec. Sec.  701.32 and 742 of the NCUA Rules and Regulations.
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    34. A CFP provides a documented framework for managing unexpected 
liquidity situations. The objective of the CFP is to ensure that the 
institution's sources of liquidity are sufficient to fund normal 
operating requirements under contingent events. A CFP also identifies 
alternative contingent liquidity resources \11\ that can be employed 
under adverse liquidity circumstances. An institution's CFP should be 
commensurate with its complexity, risk profile, and scope of 
operations.
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    \11\ There may be time constraints, sometimes lasting weeks, 
encountered in initially establishing lines with FRB and/or FHLB. As 
a result, financial institutions should plan to have these lines set 
up well in advance.
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    35. Contingent liquidity events can range from high-probability/
low-impact events to low-probability/high-impact events. Institutions 
should incorporate planning for high-probability/low-impact liquidity 
risks into the day-to-day management of sources and uses of funds. 
Institutions can generally accomplish this by assessing possible 
variations around expected cash flow projections and providing for 
adequate liquidity reserves and other means of raising funds in the 
normal course of business. In contrast, all financial institution CFPs 
will typically focus on events that, while relatively infrequent, could 
significantly impact the institution's operations. A CFP should:
     Identify Stress Events. Stress events are those that may 
have a significant impact on the institution's liquidity given its 
specific balance-sheet structure, business lines, organizational 
structure, and other characteristics. Possible stress events may 
include deterioration in asset quality, changes in agency credit 
ratings, Prompt Corrective Action (PCA) and CAMELS \12\ ratings 
downgrades, widening of credit default spreads, operating losses, 
declining financial institution equity prices, negative press coverage, 
or other events that may call into question an institution's ability to 
meet its obligations.
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    \12\ Federally-insured credit unions are evaluated using the 
``CAMEL'' rating system, which is substantially similar to the 
``CAMELS'' system without the ``S'' component for rating Sensitivity 
to market risk. Information on NCUA's rating system can be found in 
Letter to Credit Unions 07-CU-12, CAMEL Rating System.
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     Assess Levels of Severity and Timing. The CFP should 
delineate the various levels of stress severity that can occur during a 
contingent liquidity event and identify the different stages for each 
type of event. The events, stages, and severity levels identified 
should include temporary disruptions, as well as those that might be 
more intermediate term or longer-term. Institutions can use the 
different stages or levels of severity identified to design early-
warning indicators, assess potential funding needs at various points in 
a developing crisis, and specify comprehensive action plans.
     Assess Funding Sources and Needs. A critical element of 
the CFP is the quantitative projection and evaluation of expected 
funding needs and funding capacity during the stress event. This 
entails an analysis of the potential erosion in funding at alternative 
stages or severity levels of the stress event and the potential cash 
flow mismatches that may occur during the various stress levels. 
Management should base such analysis on realistic assessments of the 
behavior of funds providers during the event and incorporate 
alternative contingency funding sources. The analysis also should 
include all material on- and off-balance-sheet cash flows and their 
related effects. The result should be a realistic analysis of cash 
inflows, outflows, and funds availability at

[[Page 32043]]

different time intervals during the potential liquidity stress event in 
order to measure the institution's ability to fund operations. Common 
tools to assess funding mismatches include:
    [cir] Liquidity gap analysis--A cash flow report that essentially 
represents a base case estimate of where funding surpluses and 
shortfalls will occur over various future timeframes.
    [cir] Stress tests--A pro forma cash flow report with the ability 
to estimate future funding surpluses and shortfalls under various 
liquidity stress scenarios and the institution's ability to fund 
expected asset growth projections or sustain an orderly liquidation of 
assets under various stress events.
     Identify Potential Funding Sources. Because liquidity 
pressures may spread from one funding source to another during a 
significant liquidity event, institutions should identify alternative 
sources of liquidity and ensure ready access to contingent funding 
sources. In some cases, these funding sources may rarely be used in the 
normal course of business. Therefore, institutions should conduct 
advance planning and periodic testing to ensure that contingent funding 
sources are readily available when needed.
     Establish Liquidity Event Management Processes. The CFP 
should provide for a reliable crisis management team and administrative 
structure, including realistic action plans used to execute the various 
elements of the plan for given levels of stress. Frequent communication 
and reporting among team members, the board of directors, and other 
affected managers optimize the effectiveness of a contingency plan 
during an adverse liquidity event by ensuring that business decisions 
are coordinated to minimize further disruptions to liquidity. Such 
events may also require the daily computation of regular liquidity risk 
reports and supplemental information. The CFP should provide for more 
frequent and more detailed reporting as the stress situation 
intensifies.
     Establish a Monitoring Framework for Contingent Events. 
Institution management should monitor for potential liquidity stress 
events by using early-warning indicators and event triggers. The 
institution should tailor these indicators to its specific liquidity 
risk profile. The early recognition of potential events allows the 
institution to position itself into progressive states of readiness as 
the event evolves, while providing a framework to report or communicate 
within the institution and to outside parties. Early warning signals 
may include but are not limited to negative publicity concerning an 
asset class owned by the institution, increased potential for 
deterioration in the institution's financial condition, widening debt 
or credit default swap spreads, and increased concerns over the funding 
of off-balance-sheet items.
    36. To mitigate the potential for reputation contagion, effective 
communication with counterparties, credit-rating agencies, and other 
stakeholders when liquidity problems arise is of vital importance. 
Smaller institutions that rarely interact with the media should have 
plans in place for how they will manage press inquiries that may arise 
during a liquidity event. In addition, group-wide contingency funding 
plans, liquidity cushions, and multiple sources of funding are 
mechanisms that may mitigate reputation concerns.
    37. In addition to early warning indicators, institutions that 
issue public debt, utilize warehouse financing, securitize assets, or 
engage in material over-the-counter derivative transactions typically 
have exposure to event triggers embedded in the legal documentation 
governing these transactions. Institutions that rely upon brokered 
deposits should also incorporate PCA-related downgrade triggers into 
their CFPs since a change in PCA status could have a material bearing 
on the availability of this funding source. Contingent event triggers 
should be an integral part of the liquidity risk monitoring system. 
Institutions that originate loans for asset securitization programs 
pose heightened liquidity concerns due to the unexpected funding needs 
associated with an early amortization event or disruption of funding 
pipelines. Institutions that securitize assets should have liquidity 
contingency plans that address this potential unexpected funding 
requirement.
    38. Institutions that rely upon secured funding sources also are 
subject to potentially higher margin or collateral requirements that 
may be triggered upon the deterioration of a specific portfolio of 
exposures or the overall financial condition of the institution. The 
ability of a financially stressed institution to meet calls for 
additional collateral should be considered in the CFP. Potential 
collateral values also should be subject to stress tests since 
devaluations or market uncertainty could reduce the amount of 
contingent funding that can be obtained from pledging a given asset. 
Additionally, triggering events should be understood and monitored by 
liquidity managers.
    39. Institutions should test various elements of the CFP to assess 
their reliability under times of stress. Institutions that rarely use 
the type of funds they identify as standby sources of liquidity in a 
stress situation, such as the sale or securitization of loans, 
securities repurchase agreements, Federal Reserve discount window 
borrowing, or other sources of funds, should periodically test the 
operational elements of these sources to ensure that they work as 
anticipated. However, institutions should be aware that during real 
stress events, prior market access testing does not guarantee that 
these funding sources will remain available within the same timeframes 
and/or on the same terms.
    40. Larger, more complex institutions can benefit by employing 
operational simulations to test communications, coordination, and 
decision-making involving managers with different responsibilities, in 
different geographic locations, or at different operating subsidiaries. 
Simulations or tests run late in the day can highlight specific 
problems suc