6 July 2009
[Federal Register: July 6, 2009 (Volume 74, Number 127)]
[Notices]
[Page 32035-32044]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy09-150]
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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, 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\
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\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.
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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.
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\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.
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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.
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\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.
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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).
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\6\ Financial instruments that are illiquid, difficult to value,
marked by the presence of cash flows that are irregular, uncertain,
or difficult to model.
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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 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 board-approved 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
[[Page 32044]]
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.
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\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.
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Holding Company--Liquidity Risk Management
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 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
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
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