Pub. 11 2020 Issue 1

www.wvbankers.org 24 West Virginia Banker W ith liquidity remaining a regulatory hot button, many examiners are taking a harder look at the areas of contingency funding plans (CFPs) and the stress testing of those plans. This article discusses the key elements that go into developing an effective CFP, along with some of the more common exam findings in this area. The increased regulatory focus on CFPs highlights the impor- tance of taking a comprehensive approach to liquidity man- agement. Asset liability committees often find themselves focused on how to address current liquidity needs. While it is essential to know the bank’s current position, discussions should also center on planning for future scenarios so the bank is prepared to respond to contingent liquidity events. As such, all financial institutions, regardless of size, should have a CFP in place. A CFP is designed to ensure a bank has adequate sources of liquidity in place to fund normal operations under various contingent liquidity event scenarios. Contingent events can result from circumstances unique to a specific bank or exter- nal occurrences that are indicative of systemic financial condi- tions. Common events specific to an individual bank include operational or strategic risks, difficulties in funding asset growth, or the inability to replace maturing liabilities. External events generally tend to center around economic conditions, interest rate changes or volatility of financial markets. Con- tingent liquidity events may be unexpected and short-term in nature or result from mounting pressures that have a long- term impact on liquidity. The expected duration of events is an important consideration when developing a CFP. There are several factors to consider when designing a CFP. A comprehensive plan should achieve the following: • Identify contingent liquidity events. Possible events may include, but are not limited to, deterioration of asset or credit quality, a downgrade of CAMELS composite rating, operating losses, rapid asset growth funded with volatile liabilities, disruption of markets, a noticeable de- cline in customer relations, and negative press coverage. • Assess the severity of events. Events will have varying levels of severity and duration. Funding needs may be im- mediate or may require a prolonged period of funding. In the latter case, it is critical to evaluate the level of funding required at each stage throughout the event. • Assess funding needs. A key element to any CFP is a quantitative assessment based on projections developed Contingency Funding Plans: What to Expect from Examiners By Kelly Shafer, Suttle & Stalknaker