Pub. 11 2020 Issue 1

Spring 2020 25 West Virginia Banker Kelly Shafer is a member in the Charleston office of Suttle & Stalnaker, PLLC. Kelly has over 15 years of experience in public accounting practice, and as a member of the firm’s financial institution services group, specializes in external audit services for financial institutions. She can be reached at kshafer@suttlecpas.com . for each event. Assumptions used in the projections should be realistic and timely. Results are only as reliable as the input data, so it is important to continuously update assumptions as anticipated conditions change. Stress testing is a typical method employed by banks to evaluate the potential impact of various scenarios on liquidity needs. Cash flow shortfalls and potential erosion of funding will vary depending on the scenario and at each stage of the event. Additionally, both on-balance- sheet and off-balance-sheet cash flows should be consid- ered in the assessment. • Identify potential funding sources. Once funding needs have been identified for each event, a plan must be put in place to access funds. Because potential exists for liquidity pressures to spread from one funding source to another during a serious event, banks should identify alternative sources of liquidity. Having options availa- ble in the event of a liquidity crisis is critical. Advance planning and knowing the actions to be taken should a specified event occur is vital to ensure that contingent funding sources will be available when needed. • Establish processes for monitoring and event man- agement. Management should designate a crisis-man- agement team to execute a plan of action in the event one of the potential scenarios occurs. In a stress event, communication among all parties involved is key, includ- ing the crisis team, bank management and the board of directors. Additional reporting may be required during an event to monitor liquidity levels. Staying alert to early warning signs may prevent a potential liquidity event from becoming a full-blown crisis and possibly minimize the financial impact on the bank. Recent trends in exams indicate deficiencies in CFPs due to reliance on less stable funding sources to pursue growth. According to a recent supervisory insights publication issued by the FDIC, the first and best line of defense in response to a liquidity event is a cushion of unencumbered liquid assets, meaning that no party has a collateral claim to the assets. It is typically easier to sell unencumbered liquid assets such as U.S. agency securities, money market funds, or correspond- ent deposits than to obtain outside funding in the midst of an adverse financial situation. However, trends indicate a recent drop in liquid asset levels for community banks. An area that the FDIC cautions against is turning to bro- kered deposits as a liquidity funding source, as these types of deposits are more rate sensitive and have a higher runoff risk after maturity than other funding options. Brokered de- posits are also subject to rollover restrictions should a bank fall below well-capitalized. A heavy reliance on brokered deposits has also been linked with a higher prevalence of problem banks. Recommendations from examiners in response to CFP defi- ciencies include: • Enhanced scenario testing • Better aligning the CFP with the bank’s risk profile • Understanding asset encumbrances and backup line availability • Monitoring trigger events that are early indicators of potential liquidity problems Examiners expect to see that banks not only have a CFP in place, but are also stress testing the plan for various scenarios, typically on a quarterly basis. A planned response should be developed for each vulnerability identified. The expectation is that management not only went through the process, but has considered the results and prepared a plan of action. Contingency planning is an ongoing process that is constantly changing. While the considerations outlined above are impor- tant steps in developing an effective CFP, no two plans will be alike. In order to get the most value out of a CFP, the plan should be tailored to the size, complexity, and specific risks faced by each bank. Although no one intends for their bank to experience a liquidity crisis, you don’t want to be caught unprepared should the worst happen. Having a plan in place and the key players identified ahead of time will set your bank up to successfully navigate through a difficult situation.  The USDA published an interim final regulation governing growth and production of hemp and the banking regulators issued a statement reducing the Suspicious Activity Report (SAR) filing requirements.