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• W309654154 abstract "[ILLUSTRATION OMITTED] In the movie, It's a Wonderful Life, George Bailey, building and loan executive, solves a liquidity crisis with an impassioned speech to depositors about the role of the local bank in the community. Deposits aren't sitting in the vault, he tells the gathered savers. They're in this house, and that development, and so forth. Bailey, as played by James Stewart, makes his case, and all but one grump return their deposits. Liquidity crisis averted. In real life, liquidity contingencies have to be solved by preplanning and forethought, not clever oratory. Liquidity's evolution Prior to Autumn 2008, the 2000s had been a prosperous decade for the nation's financial institutions. There were loans to be made on every street corner. Communities were undergoing expansions and financial institution customers were looking for every avenue to enhance and leverage investments in those projects. To handle this growth, many banks needed to leverage their own balance sheets. They chose non-core capital options, including trust preferred, subordinated debt, and holding company loans. Such capital structure leveraging has had a major impact on the health of balance sheets and liquidity management. Many institutions shifted from the asset-based liquidity strategies of the past to liability-based funding strategies. They used a combination of FHLB advances and other borrowings, brokered deposits, and internet CDs not only as core funding sources but also as a backstop, should emergency funds become necessary. Such techniques were previously used solely as liquidity sources of last resort. As they were used to leverage the balance sheet, a new set of issues has emerged regarding balance sheet management. Therein lie the reasons the regulators have called for enhanced liquidity risk management through two Financial Institution Letters on Liquidity Risk Management. While the guidance provided a framework for liquidity risk management, it does not provide much in the way of specifics. Stress testing--much like the exercise performed on 19 megabanks earlier this year--is critical. A financial institution's liquidity should be stressed to determine how senior management would manage through an event that results in a negative impact on a bank's liquidity and funding strategies. For a greater understanding of this risk management tool, let's explore how a hypothetical banker named worked through a liquidity stress test. Although the banker and bank are fabricated, the example is based on actual experiences. Developing a methodology Mike is CFO of Bank, a $300 million bank holding company in a growing metro market in the Midwest. Quality Bank has experienced some challenges with asset quality over the past few years. This has led to employee turnover, new policies and procedures, and increased scrutiny from regulators. The bank identified the steps necessary for the development of a contingency funding plan: * Identify the appropriate team to gather and analyze relevant liquidity and funding data. * Discuss the institution's funding philosophies and challenges. * Populate a model with the bank's current balance sheet and proforma cash flows. * Discuss and document policy limitations and key ratios related to liquidity and balance sheet funding. * Discuss stress events and model them. * Discuss results of the stress events and determine how the institution would manage through such events. * Document steps management would employ when dealing with a stressed liquidity event as part of a contingency funding plan. * Determine how the institution will monitor the liquidity funding plan going forward. * Determine who is responsible for liquidity plan execution. Because liquidity analysis is comprehensive to all areas of a bank, Mike assembled a team of key senior managers who have the ability to effect change within Quality Bank's balance sheet and who would ultimately play an active role in managing any liquidity crisis. …" @default.
• W309654154 created "2016-06-24" @default.
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• W309654154 date "2009-11-01" @default.
• W309654154 modified "2023-09-24" @default.
• W309654154 title "Not James Stewart? Then You Need a Liquidity Plan: Devising a Liquidity Contingency Plan Now, Rather Than When a Challenge Hits, Helps Ensure You Continue to Have a Wonderful Banking Life" @default.
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