Liquidity Risk

October 25, 2017

Many banks across the Tenth District are facing the pressures of continued loan growth without corresponding increases in stable funding sources.  Recent trends indicate institutions have been funding loan growth through a reduction in liquid assets and increases in non-traditional funding sources, such as brokered deposits, listing service funds, and secured debt.  Supervisory expectations around liquidity risk remain consistent; that is, institutions should maintain a sufficient cushion of unencumbered liquid assets, appropriately diverse funding sources, and comprehensive contingency funding plans that address potential adverse liquidity events.  Each of these expectations is addressed in the Federal Reserve's Supervision and Regulation (SR) Letter 10-6, "Interagency Policy Statement on Funding and Liquidity Risk Management."  

Banks with increasing reliance on brokered deposits, listing service funds, and borrowings should also understand the various risks presented by, and supervisory expectations related to, these funding types.  Banks with elevated reliance on these potentially volatile sources are expected to maintain sound risk management, including a contingency funding plan that evaluates and establishes alternative sources of potential funding.  Specifically, risks presented by potentially volatile short-term liabilities should be viewed in conjunction with the institution's other risk exposures, capital position, and capital planning.  Rules applicable to these types of deposits are contained in Regulation H, Subpart D, which incorporates guidance issued under Section 29 of the Federal Deposit Insurance Act.

Additional resources include:
FedLinks Bulletin, "Supervisory Expectations for Contingency Funding Plans."