Contingency Liquidity Plan

When the going gets tough, the tough, smart banks always know they can put into play their contingency liquidity plan. The FDIC calls it that way too. But for them, it’s not just a game plan, it’s a rule. As they officially put it, “Contingency plans must be in force, and should include strategies for handling liquidity crises and procedures that address cash flow shortfalls in emergency situations.”

Recognizing this, National CD Rateline follows a protocol with clients aimed to create a customized portfolio which develops alternate emergency funding relationships with lenders, other liability holders, and market participants that are diversified and reviewed periodically to ensure a capacity to access funding.

This can be a delicate task requiring a broad experience in the marketplace and precision judgment. For example, effective liquidity management does not necessarily mean turning to the cheapest funding source available. A preferable option might be choosing a source that is not the cheapest but avoids a funding concentration, as such funding increases a liquidity risk. We believe the frequency of contact and the use of diversified, flexible funding sources are indicators of a strong funding relationship.

Along with cost and diversification issues, any sound contingency liquidity solution should consider maturity and repricing balance sheet mismatches, anticipated funding needs, as well as reliable, broad-based, and thoroughly documented economic and market forecasts.

No two banks are alike, in terms of the sophistication and depth of their funding activities. At National CD Rateline we stand ready to analyze and effectively manage each client’s explicit liquidity concerns with a powerful information system, strong emphasis on exploring funding needs under various scenarios, and the diversified, custom-made plans so crucial to realistic and effective contingency liquidity management.