13656 Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency [Docket ID OCC–2010–0004] FEDERAL RESERVE SYSTEM [Docket No. OP–1362] FEDERAL DEPOSIT INSURANCE CORPORATION DEPARTMENT OF THE TREASURY Office of Thrift Supervision [Docket ID OTS–2010–0005] NATIONAL CREDIT UNION ADMINISTRATION Interagency Policy Statement on Funding and Liquidity Risk Management AGENCY: 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: Final policy statement. SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the agencies) in conjunction with the Conference of State Bank Supervisors (CSBS), are adopting this policy statement. The policy statement summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, when appropriate, supplements them with the ‘‘Principles for Sound Liquidity Risk Management and Supervision’’ issued by the Basel Committee on Banking Supervision (BCBS) in September 2008.1 This policy statement emphasizes supervisory expectations for all depository institutions including banks, thrifts, and credit unions. DATES: This policy statement is effective on May 21, 2010. Comments on the Paperwork Reduction Act burden estimates only may be submitted on or before April 21, 2010. 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. 1 NCUA is not a member of the Basel Committee on Banking Supervision and federally insured credit unions are not directly referenced in the principles issued by the Committee. Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices 13657 FRB: James Embersit, Deputy be expected to maintain liquidity has been omitted from this final policy Associate Director, Market and commensurate with their own profiles statement. Liquidity Risk, 202–452–5249 or Mary on a stand-alone basis. These Many commenters expressed concern Arnett, Supervisory Financial Analyst, commenters indicated that the language over whether the agencies were being Market and Liquidity Risk, 202–721– in the proposed statement suggested too prescriptive in the policy statement 4534 or Brendan Burke, Supervisory that each regulated entity affiliated with regarding expectations for contingency Financial Analyst, Supervisory Policy a parent financial institution would be funding plans (CFPs). These and Guidance, 202–452–2987. required to maintain its own cushion of commenters asserted that there needs to FDIC: Kyle Hadley, Chief Capital liquid assets. This could result in be flexibility in the design of CFPs such Markets Examination Support, (202) restrictions on the movement of that institutions can respond quickly to 898–6532. liquidity within an organization in a rapidly moving events that may not OTS: Rich Gaffin, Financial Analyst, time of stress. Such restrictions are have been anticipated during the design Risk Modeling and Analysis, (202) 906– commonly referred to as ‘‘trapped pools of the CFP. Other commenters asked 6181or Marvin Shaw, Senior Attorney, of liquidity’’. These commenters assert whether the policy statement requires Regulations and Legislation Division, that there are advantages to maintaining institutions to use certain funding (202) 906–6639. liquidity on a centralized basis that sources (e.g., FHLB advances or NCUA: Amy Stroud, Program Officer, were evident during the current market brokered deposits) in order to show Office of Examination and Insurance, disruption. Further, they assert that diversification of funding within their (703) 518–6372. requiring separate pools of liquidity CFP. may discourage the use of operating The agencies believe that the policy SUPPLEMENTARY INFORMATION: subsidiaries. statement provides adequate flexibility I. Background The agencies recognize the need for in supervisory expectations for the The recent turmoil in the financial clarification of the principles development and use of CFPs. In fact markets clearly demonstrated the surrounding the management of the policy statement provides a basic importance of good liquidity risk liquidity with respect to the framework that allows for compliance management to the safety and circumstances and responsibilities of across a broad range of business models soundness of financial institutions. In various types of legal entities and whether financial institutions are large light of this experience, supervisors supervisory interests pertaining to them, or small. While the policy statement and, therefore, have clarified the scope addresses the need to diversify an worked on an international and national of application of the policy statement institution’s funding sources, there is no level through various groups 2 to assess with regard to the maintenance of requirement to use a particular funding the lessons learned on individual liquidity on a legal entity basis. source. The agencies believe that a institutions’ management of liquidity Specifically, the policy statement diversification of funding sources risk and inform future supervisory indicates that the agencies expect strengthens an institution’s ability to efforts on this topic. As one result of depository institutions to maintain withstand idiosyncratic and market these efforts, the Basel Committee on adequate liquidity both at the wide liquidity shocks. Banking Supervision issued in consolidated level and at significant Many commenters representing September 2008, Principles for Sound legal entities. The agencies recognize financial institution trade organizations Liquidity Risk Management and that a depository institution’s approach (both domestic and international) and Supervision, which contains 17 to liquidity risk management will special-purpose organizations such as principles detailing international depend on the scope of its business banker’s banks and clearing house supervisory guidance for sound operations, business mix, and other organizations expressed concern over liquidity risk management. legal or operational constraints. As an the treatment of federal funds purchased II. Comments on the Proposed Policy overarching principle, depository as a concentration of funding. As of this Statement institutions should maintain sufficient writing, under a separate issuance, the liquidity to ensure compliance during agencies issued for public comment, On July 6, 2009, the agencies economically stressed periods with ‘‘Correspondent Concentrations Risks.’’ 4 requested public comment on all applicable legal and regulatory That guidance covers supervisory aspects of a proposed interagency policy restrictions on the transfer of liquidity expectations for the risks that can occur statement 3 on funding and liquidity risk among regulated entities. The agencies management. The comment period in correspondent relationships. The have modified the language in the draft guidance can be found at http:// closed on September 4, 2009. The policy statement to reflect this view. agencies received 22 letters from www.occ.treas.gov/fr/fedregister/ The principles of liquidity risk 74fr48956.pdf. financial institutions, bank consultants, management articulated in this policy Some commenters expressed concern industry trade groups, and individuals. statement are broadly applicable to bank over limiting the high-quality liquid Overall, the commenters generally and thrift holding companies, and non- assets used in the liquidity buffer to supported the agencies’ efforts to insured subsidiaries of holding securities such as U.S. Treasuries. These consolidate and supplement supervisory companies. However, because such commenters assert that limiting the expectations for liquidity risk institutions may face unique liquidity liquidity buffer to these instruments management. risk profiles and liquidity management would limit diversification of funding Many commenters expressed concern challenges, the Federal Reserve and sources and potentially harm market regarding the proposed policy Office of Thrift Supervision are liquidity. statement’s articulation of the principle articulating the applicability of the The agencies agree with some that separately regulated entities would policy statement’s principles to these comments on the need for a liquidity institutions in transmittal letters of the buffer of unencumbered high-quality 2 Significant international groups addressing policy statement to their regulated assets sized to cover an institution’s risk these issues include the Basel Committee on Banking Supervision (BCBS), Senior Supervisors institutions. As a result, the guidance Group, and the Financial Stability Board. for holding companies contained in the 4 NCUA did not participate in this proposed 3 74 FR 32035, (July 9, 2009). original proposal issued for comment guidance. 13658 Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices given an appropriate stress test. The the NCUA’s Examiner’s Guide but this information collection. The agencies believe that such buffers form provides a uniform set of sound comments are summarized below. an essential part of an effective liquidity business practices, with the expectation Comments continue to be invited on: risk management system. The question that each institution will scale the (a) Whether the collection of centers on the composition of assets that guidance to its complexity and risk information is necessary for the proper make up an institution’s liquidity profile. The policy statement, when performance of the Federal banking buffer. This is an issue that not only issued by NCUA, will likely be an agencies’ functions, including whether resonates with this domestic policy attachment to an NCUA Letter to Credit the information has practical utility; statement but with the Basel Committee Unions. The letter will provide (b) The accuracy of the estimates of on Banking Supervision’s (BCBS) additional guidance to federally insured the burden of the information ‘‘Principles for Sound Liquidity Risk credit unions on NCUA’s expectations. collection, including the validity of the Management and Supervision.’’ It is the The two credit union commenters also methodology and assumptions used; intention of the agencies for institutions characterized the policy statement as (c) Ways to enhance the quality, to maintain a buffer of liquid assets that imposing additional burden on federally utility, and clarity of the information to are of such high quality that they can be insured credit unions, specifically as it be collected; easily and immediately converted into relates to stress testing and overall (d) Ways to minimize the burden of cash. Additionally, these assets should liquidity management reporting. the information collection on have little or no loss in value when Depending on a credit union’s risk respondents, including through the use converted into cash. In addition to the profile, such testing and reporting is of automated collection techniques or example used in the policy statement, already expected. NCUA ‘‘Letter to other forms of information technology; other examples of high-quality liquid Credit Unions 02–CU–05, Examination and assets may include government Program Liquidity Questionnaire’’, (e) Estimates of capital or start up guaranteed debt, excess reserves at the issued in March of 2002, includes costs and costs of operation, Federal Reserve, and securities issued examiner review of stress testing maintenance, and purchase of services by U.S. government sponsored agencies. performed as well as an overall to provide information. The policy statement was amended to assessment of the adequacy of Comments on these questions should include additional examples. management reporting.5 The policy be directed to: Some commenters expressed concern OCC: Communications Division, statement does not add to a credit over supervisory expectations for CFP Office of the Comptroller of the union’s current burden in this regard testing. These commenters assert that Currency, Mailstop 2–3, Attention but rather clarifies NCUA’s expectation the agencies need to clarify their 1557–NEW, 250 E Street, SW., for those credit unions with risk profiles expectations for testing of components Washington, DC 20219. In addition warranting a higher degree of liquidity of the CFP. comments may be sent by fax to (202) risk management. The agencies agreed with the Lastly, the two credit union 874–5274, or by electronic mail to commenters and have amended the commenters encouraged NCUA to not email@example.com. You may policy statement to include a include corporate credit unions within personally inspect and photocopy recognition that testing of certain the scope of this policy statement as the comments at the OCC, 250 E Street, elements of the CFP may be impractical. corporate credit union network may be SW., Washington, DC. For security For example, this may include the sale restructured. NCUA’s intent is for the reasons, the OCC requires that visitors of assets in which the sale of such assets policy statement to apply only to make an appointment to inspect may have unintended market federally insured, natural person credit comments. You may do so by calling consequences. However, other (202) 874–4700. Upon arrival, visitors unions, not corporate credit unions and components of the CFP can and should will be required to present valid the policy statement has been modified be tested (e.g., operational components government-issued photo identification to clarify that point. such as ensuring that roles and Accordingly, for all the reasons and to submit to security screening in responsibilities are up-to-date and discussed above, the agencies have order to inspect and photocopy appropriate; ensuring that legal and determined that it is appropriate to comments. operational documents are current and adopt as final the proposed policy FRB: You may submit comments, appropriate; and ensuring that cash statement as amended. identified by Docket No. OP–1362, by collateral can be moved where and any of the following methods: when needed and back-up liquidity III. Paperwork Reduction Act • Agency Web site: http:// lines can be drawn). In accordance with section 3512 of www.federalreserve.gov. Follow the Two credit union commenters the Paperwork Reduction Act of 1995, instructions for submitting comments at questioned the need for NCUA to adopt 44 U.S.C. 3501–3521 (PRA), the http://www.federalreserve.gov/ the proposed policy statement in light of Agencies may not conduct or sponsor, generalinfo/foia/ProposedRegs.cfm. existing guidance in NCUA’s Examiner’s and the respondent is not required to • Federal eRulemaking Portal: http:// Guide. The commenters questioned the respond to, an information collection www.regulations.gov. Follow the appropriateness of imposing new unless it displays a currently valid instructions for submitting comments. requirements on credit unions. The Office of Management and Budget • E-mail: purpose of the policy statement is to (OMB) control number. The information firstname.lastname@example.org. reiterate the process and liquidity risk collection requirements contained in Include the docket number in the management measures that depository this guidance have been submitted to subject line of the message. institutions, including federally insured OMB for approval. • FAX: 202/452–3819 or 202/452– credit unions, should follow to On July 6, 2009,6 the agencies sought 3102. appropriately manage related risks. The comment on the burden estimates for • Mail: Jennifer J. Johnson, Secretary, policy statement does not impose Board of Governors of the Federal requirements and contemplates 5 The letter can be found at NCUA’s Web site at Reserve System, 20th Street and flexibility in its application. The policy http://www.ncua.gov/letters/2002/02–CU–05.html. Constitution Avenue, NW., Washington, statement is also not intended to replace 6 74 FR 32035. DC 20551. Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices 13659 All public comments are available ProposedRegulations.aspx Follow the Section 20 would require that from the FRB’s Web site at http:// instructions for submitting comments. liquidity risk reports provide aggregate www.federalreserve.gov/generalinfo/ • E-mail: Address to information with sufficient supporting foia/ProposedRegs.cfm as submitted, email@example.com. Include ‘‘[Your detail to enable management to assess unless modified for technical reasons. name] Comments on Proposed the sensitivity of the institution to Accordingly, your comments will not be Interagency Guidance—Funding and changes in market conditions, its own edited to remove any identifying or Liquidity Risk Management,’’ in the e- financial performance, and other contact information. Public comments mail subject line. important risk factors. Institutions may also be viewed in electronic or • Fax: (703) 518–6319. Use the should also report on the use of and paper form in Room MP–500 of the subject line described above for e-mail. availability of government support, such FRB’s Martin Building (20th and C • Mail: Address to Mary F. Rupp, as lending and guarantee programs, and Streets, NW.) between 9 a.m. and 5 p.m. Secretary of the Board, National Credit implications on liquidity positions, on weekdays. Union Administration, 1775 Duke particularly since these programs are FDIC: Interested parties are invited to Street, Alexandria, Virginia 22314– generally temporary or reserved as a submit written comments. All 3428. source for contingent funding. comments should refer to the name of • Hand Delivery/Courier: Same as Comment Summary: The OCC, FRB, the collection, ‘‘Liquidity Risk mail address. and OTS received one comment Management.’’ Comments may be Public inspection: All public regarding its burden estimates under the submitted by any of the following comments are available on the agency’s Paperwork Reduction Act. The methods: Web site at http://www.ncua.gov/ comment, which was from a trade • http://www.FDIC.gov/regulations/ Resources/RegulationsOpinionsLaws/ association, stated that some community laws/federal/propose.html. ProposedRegulations.aspx as submitted, banks with less than $10 billion in • E-mail: firstname.lastname@example.org. except as may not be possible for assets reported to them that the estimate • Mail: Leneta G. Gregorie technical reasons. Public comments will of 80 burden hours for small (202.898.3719), Counsel, Federal not be edited to remove any identifying respondents is accurate. Other Deposit Insurance Corporation, or contact information. Paper copies of community banks estimated that it PA1730–3000, 550 17th Street, NW., comments may be inspected in NCUA’s would take significantly longer, Washington, DC 20429. law library, at 1775 Duke Street, especially in the first year of • Hand Delivery: Comments may be Alexandria, Virginia 22314, by implementation. The agencies have hand-delivered to the guard station at appointment weekdays between 9 a.m. determined that, on average, the burden the rear of the 550 17th Street Building and 3 p.m. To make an appointment, estimate is accurate and, therefore they (located on F Street), on business days call (703) 518–6546 or send an e-mail to have not changed the burden estimates between 7 a.m. and 5 p.m. _OGC Mail @ncua.gov. in the final policy statement. OTS: Send comments, referring to the You should send a copy of your The NCUA received two comments collection by title of the proposal or by comments to the OMB Desk Officer for from trade organizations regarding the OMB approval number, to OMB and the agencies, by mail to U.S. Office of Paperwork Reduction Act, section III, OTS at these addresses: Office of Management and Budget, 725 17th items (a) through (e). One commenter Information and Regulatory Affairs, Street, NW., #10235, Washington, DC stated that no additional information Attention: Desk Officer for OTS, U.S. 20503, or by fax to (202) 395–6974. should be required of credit unions if Office of Management and Budget, 725– Title of Information Collection: they are following current procedures 17th Street, NW., Room 10235, Funding and Liquidity Risk addressed in NCUA’s Examiner’s Guide. Washington, DC 20503, or by fax to Management. Sections 14 and 20 of the proposed (202) 395–6974; and Information OMB Control Numbers: New guidance include specific analysis and Collection Comments, Chief Counsel’s collection; to be assigned by OMB. reporting expectations based on the Office, Office of Thrift Supervision, Abstract: Section 14 states that complexity of the credit union and risk 1700 G Street, NW., Washington, DC institutions should consider liquidity profile. The time estimates provided by 20552, by fax to (202) 906–6518, or by costs, benefits, and risks in strategic NCUA reflect the estimated amount of e-mail to planning and budgeting processes. time if credit unions complied with email@example.com. Significant business activities should be those expectations. The time burden OTS will post comments and the related evaluated for liquidity risk exposure as estimate is not in addition to complying index on the OTS Internet Site at http:// well as profitability. More complex and with NCUA Examiner’s Guide and such www.ots.treas.gov. In addition, sophisticated institutions should analysis and reporting are existing interested persons may inspect incorporate liquidity costs, benefits, and expectations for complex, higher risk comments at the Public Reading Room, risks in the internal product pricing, credit unions (refer to Letter to Credit 1700 G Street, NW., by appointment. To performance measurement, and new Unions 02–CU–05). It is difficult to make an appointment, call (202) 906– product approval process for all accurately estimate how many credit 5922, send an e-mail to material business lines, products and unions would have an implementation firstname.lastname@example.org, or send a activities. Incorporating the cost of burden for Sections 14 and 20 under the facsimile transmission to (202) 906– liquidity into these functions should proposed guidance and the extent of 7755. align the risk-taking incentives of that additional burden. It is largely NCUA: You may submit comments by individual business lines with the dependent upon the structure of the any of the following methods (Please liquidity risk exposure their activities credit union and the inherent risks send comments by one method only): create for the institution as a whole. The present, which will fluctuate over time. • Federal eRulemaking Portal: http:// quantification and attribution of The initial comment period for the www.regulations.gov. Follow the liquidity risks should be explicit and guidance solicited comments on time instructions for submitting comments. transparent at the line management burden estimates. No specific responses NCUA Web Site: http:// level and should include consideration were provided from credit unions to www.ncua.gov/Resources/ of how liquidity would be affected support or challenge the time estimates RegulationsOpinionsLaws/ under stressed conditions. provided. The time estimates provided 13660 Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices are an average per credit union based on Burden under Section 14: 720 hours these principles with the international asset size alone and may not accurately per large respondent, 240 hours per statement recently issued by the Basel reflect the time necessary for a mid-size respondent, and 80 hours per Committee on Banking Supervision particular credit union to comply with small respondent. titled ‘‘Principles for Sound Liquidity the expectations of Sections 14 and 20. Burden under Section 20: 4 hours per Risk Management and Supervision.’’ 9 Affected Public: month. 2. Recent events illustrate that OCC: National banks, their Total estimated annual burden: liquidity risk management at many subsidiaries, and federal branches or 128,128. financial institutions is in need of agencies of foreign banks. NCUA: improvement. Deficiencies include FRB: Bank holding companies, state Number of respondents: 7,736 total insufficient holdings of liquid assets, member banks, state-licensed branches (153 large (over $1 billion in assets), 501 funding risky or illiquid asset portfolios and agencies of foreign banks (other mid-size ($250 million to $1 billion), with potentially volatile short-term than insured branches), and and 7,082 small (less than $250 liabilities, and a lack of meaningful cash corporations organized or operating million)). flow projections and liquidity under sections 25 or 25A of the Federal Burden under Section 14: 240 hours contingency plans. Reserve Act (Agreement corporations per large respondent, 80 hours per mid- 3. The following guidance reiterates and Edge corporations). size respondent, and 20 hours per small the process that institutions should FDIC: Insured state nonmember respondent. follow to appropriately identify, banks. Burden under Section 20: 2 hours per measure, monitor, and control their OTS: Federal savings associations and month. funding and liquidity risk. In particular, Total estimated annual burden: the guidance re-emphasizes the their affiliated holding companies. NCUA: Federally-insured credit 404,104. importance of cash flow projections, unions. IV. Guidance diversified funding sources, stress Type of Review: Regular. testing, a cushion of liquid assets, and The text of the Interagency Policy Estimated Burden: a formal well-developed contingency Statement on Funding and Liquidity OCC: funding plan (CFP) as primary tools for Risk Management is as follows: Number of respondents: 1,560 total measuring and managing liquidity risk. (13 large (over $100 billion in assets), 29 Interagency Policy Statement on The agencies expect every depository mid-size ($10–$100 billion), 1,518 small Funding and Liquidity Risk financial institution 10 to manage (less than $10 billion)). Management liquidity risk using processes and Burden Under Section 14: 720 hours 1. The Office of the Comptroller of the systems that are commensurate with the per large respondent, 240 hours per Currency (OCC), Board of Governors of institution’s complexity, risk profile, mid-size respondent, and 80 hours per the Federal Reserve System (FRB), and scope of operations. Liquidity risk small respondent. Federal Deposit Insurance Corporation management processes and plans Burden under Section 20: 4 hours per (FDIC), the Office of Thrift Supervision should be well documented and month. (OTS), and the National Credit Union available for supervisory review. Failure Total estimated annual burden: Administration (NCUA) (collectively, to maintain an adequate liquidity risk 212,640 hours. management process will be considered the agencies) in conjunction with the FRB: an unsafe and unsound practice. Conference of State Bank Supervisors Number of respondents: 6,156 total (CSBS) 7 are issuing this guidance to Liquidity and Liquidity Risk (29 large (over $100 billion in assets); provide consistent interagency 117 mid-size ($10–$100 billion); and 4. Liquidity is a financial institution’s expectations on sound practices for capacity to meet its cash and collateral 6,010 small (less than $10 billion). managing funding and liquidity risk. Burden under Section 14: 720 hours obligations at a reasonable cost. The guidance summarizes the principles Maintaining an adequate level of per large respondent, 240 hours per of sound liquidity risk management that liquidity depends on the institution’s mid-size respondent, and 80 hours per the agencies have issued in the past 8 ability to efficiently meet both expected small respondent. and, where appropriate, harmonizes and unexpected cash flows and Burden under Section 20: 4 hours per month. collateral needs without adversely 7 The various state banking supervisors may Total estimated annual burden: affecting either daily operations or the implement this policy statement through their 825,248 hours. individual supervisory process. financial condition of the institution. FDIC: 8 For national banks, see the Comptroller’s 5. Liquidity risk is the risk that an Number of respondents: 5,076 total Handbook on Liquidity. For state member banks institution’s financial condition or (10 large (over $20 billion in assets), 309 and bank holding companies, see the Federal overall safety and soundness is Reserve’s Commercial Bank Examination Manual adversely affected by an inability (or mid-size ($1–$20 billion), 4,757 small (section 4020), Bank Holding Company Supervision (less than $1 billion)). Manual (section 4010), and Trading and Capital perceived inability) to meet its Burden under Section 14: 720 hours Markets Activities Manual (section 2030). For state per large respondent, 240 hours per non-member banks, see the FDIC’s Revised 9 Basel Committee on Banking Supervision, Examination Guidance for Liquidity and Funds ‘‘Principles for Sound Liquidity Risk Management mid-size respondent, and 80 hours per Management (Trans. No. 2002–01) (Nov. 19, 2001) and Supervision’’, September 2008. See http:// small respondent. as well as Financial Institution Letter 84–2008, www.bis.org/publ/bcbs144.htm. Federally insured Burden under Section 20: 4 hours per Liquidity Risk Management (August 2008). For credit unions are not directly referenced in the month. savings associations, see the Office of Thrift principles issued by the Basel Committee. Supervision’s Examination Handbook, section 530, 10 Unless otherwise indicated, this interagency Total estimated annual burden: ‘‘Cash Flow and Liquidity Management’’; and the guidance uses the term ‘‘depository financial 705,564. Holding Companies Handbook, section 600. For institutions’’ or ‘‘institutions’’ to include banks, OTS: federally insured credit unions, see Letter to Credit saving associations, and federally insured natural Number of respondents: 801 total (14 Unions No. 02–CU–05, Examination Program person credit unions. Federally insured credit Liquidity Questionnaire (March 2002). Also see unions (FICUs) do not have holding company large (over $100 billion in assets), 104 Basel Committee on Banking Supervision, affiliations, and, therefore, references to holding mid-size ($10–$100 billion), 683 small ‘‘Principles for Sound Liquidity Risk Management companies contained within this guidance are not (less than $10 billion)). and Supervision,’’ (September 2008). applicable to FICUs. Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices 13661 obligations. An institution’s obligations, events and emergency cash flow 9. Senior management should and the funding sources used to meet requirements. determine the structure, responsibilities, them, depend significantly on its • Internal controls and internal audit and controls for managing liquidity risk business mix, balance-sheet structure, processes sufficient to determine the and for overseeing the liquidity and the cash flow profiles of its on- and adequacy of the institution’s liquidity positions of the institution. These off-balance-sheet obligations. In risk management process. elements should be clearly documented managing their cash flows, institutions Supervisors will assess these critical in liquidity risk policies and confront various situations that can give elements in their reviews of an procedures. For institutions comprised rise to increased liquidity risk. These institution’s liquidity risk management of multiple entities, such elements include funding mismatches, market process in relation to its size, should be fully specified and constraints on the ability to convert complexity, and scope of operations. documented in policies for each assets into cash or in accessing sources material legal entity and subsidiary. of funds (i.e., market liquidity), and Corporate Governance Senior management should be able to contingent liquidity events. Changes in 7. The board of directors is ultimately monitor liquidity risks for each entity economic conditions or exposure to responsible for the liquidity risk credit, market, operation, legal, and across the institution on an ongoing assumed by the institution. As a result, reputation risks also can affect an the board should ensure that the basis. Processes should be in place to institution’s liquidity risk profile and institution’s liquidity risk tolerance is ensure that the group’s senior should be considered in the assessment established and communicated in such management is actively monitoring and of liquidity and asset/liability a manner that all levels of management quickly responding to all material management. clearly understand the institution’s developments and reporting to the approach to managing the trade-offs boards of directors as appropriate. Sound Practices of Liquidity Risk between liquidity risk and short-term 10. Institutions should clearly identify Management profits. The board of directors or its the individuals or committees 6. An institution’s liquidity delegated committee of board members responsible for implementing and management process should be should oversee the establishment and making liquidity risk decisions. When sufficient to meet its daily funding approval of liquidity management an institution uses an asset/liability needs and cover both expected and strategies, policies and procedures, and committee (ALCO) or other similar unexpected deviations from normal review them at least annually. In senior management committee, the operations. Accordingly, institutions addition, the board should ensure that committee should actively monitor the should have a comprehensive it: institution’s liquidity profile and should management process for identifying, • Understands the nature of the have sufficiently broad representation measuring, monitoring, and controlling liquidity risks of its institution and liquidity risk. Because of the critical across major institutional functions that periodically reviews information importance to the viability of the can directly or indirectly influence the necessary to maintain this institution, liquidity risk management understanding. institution’s liquidity risk profile (e.g., should be fully integrated into the • Establishes executive-level lines of lending, investment securities, institution’s risk management processes. authority and responsibility for wholesale and retail funding). Critical elements of sound liquidity risk managing the institution’s liquidity risk. Committee members should include management include: • Enforces management’s duties to senior managers with authority over the • Effective corporate governance identify, measure, monitor, and control units responsible for executing consisting of oversight by the board of liquidity risk. liquidity-related transactions and other directors and active involvement by • Understands and periodically activities within the liquidity risk management in an institution’s control reviews the institution’s CFPs for management process. In addition, the of liquidity risk. handling potential adverse liquidity committee should ensure that the risk • Appropriate strategies, policies, events. measurement system adequately procedures, and limits used to manage • Understands the liquidity risk identifies and quantifies risk exposure. and mitigate liquidity risk. profiles of important subsidiaries and The committee also should ensure that • Comprehensive liquidity risk affiliates as appropriate. the reporting process communicates measurement and monitoring systems 8. Senior management is responsible accurate, timely, and relevant (including assessments of the current for ensuring that board-approved information about the level and sources and prospective cash flows or sources strategies, policies, and procedures for of risk exposure. and uses of funds) that are managing liquidity (on both a long-term commensurate with the complexity and and day-to-day basis) are appropriately Strategies, Policies, Procedures, and business activities of the institution. executed within the lines of authority Risk Tolerances • Active management of intraday and responsibility designated for 11. Institutions should have liquidity and collateral. managing and controlling liquidity risk. documented strategies for managing • An appropriately diverse mix of This includes overseeing the liquidity risk and clear policies and existing and potential future funding development and implementation of sources. procedures for limiting and controlling appropriate risk measurement and • Adequate levels of highly liquid reporting systems, liquid buffers (e.g., risk exposures that appropriately reflect marketable securities free of legal, cash, unencumbered marketable the institution’s risk tolerances. regulatory, or operational impediments, securities, and market instruments), Strategies should identify primary that can be used to meet liquidity needs CFPs, and an adequate internal control sources of funding for meeting daily in stressful situations. infrastructure. Senior management is operating cash outflows, as well as • Comprehensive contingency also responsible for regularly reporting seasonal and cyclical cash flow funding plans (CFPs) that sufficiently to the board of directors on the liquidity fluctuations. Strategies should also address potential adverse liquidity risk profile of the institution. address alternative responses to various 13662 Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices adverse business scenarios.11 Policies (corporate-owned) life insurance, and risk exposure and profitability. More and procedures should provide for the less marketable loan portfolios). complex and sophisticated institutions formulation of plans and courses of • Funding concentrations that should incorporate liquidity costs, actions for dealing with potential address diversification of funding benefits, and risks in the internal temporary, intermediate-term, and long- sources and types, such as large liability product pricing, performance term liquidity disruptions. Policies, and borrowed funds dependency, measurement, and new product procedures, and limits also should secured versus unsecured funding approval process for all material address liquidity separately for sources, exposures to single providers of business lines, products, and activities. individual currencies, legal entities, and funds, exposures to funds providers by Incorporating the cost of liquidity into business lines, when appropriate and market segments, and different types of these functions should align the risk- material, and should allow for legal, brokered deposits or wholesale funding. taking incentives of individual business regulatory, and operational limits for the • Funding concentrations that lines with the liquidity risk exposure transferability of liquidity as well. address the term, re-pricing, and market their activities create for the institution Senior management should coordinate characteristics of funding sources with as a whole. The quantification and the institution’s liquidity risk consideration given to the nature of the attribution of liquidity risks should be management with disaster, contingency, assets they fund. This may include explicit and transparent at the line and strategic planning efforts, as well as diversification targets for short-, management level and should include with business line and risk management medium-, and long-term funding; consideration of how liquidity would be objectives, strategies, and tactics. instrument type and securitization affected under stressed conditions. vehicles; and guidance on 12. Policies should clearly articulate a concentrations for currencies and Liquidity Risk Measurement, liquidity risk tolerance that is geographical markets. Monitoring, and Reporting appropriate for the business strategy of • Contingent liability exposures such 15. The process of measuring liquidity the institution considering its as unfunded loan commitments, lines of risk should include robust methods for complexity, business mix, liquidity risk credit supporting asset sales or comprehensively projecting cash flows profile, and its role in the financial securitizations, and collateral arising from assets, liabilities, and off- system. Policies should also contain requirements for derivatives balance-sheet items over an appropriate provisions for documenting and transactions and various types of set of time horizons. For example, time periodically reviewing assumptions secured lending. buckets may be daily for very short used in liquidity projections. Policy • Exposures of material activities, timeframes out to weekly, monthly, and guidelines should employ both such as securitization, derivatives, quarterly for longer time frames. Pro quantitative targets and qualitative trading, transaction processing, and forma cash flow statements are a critical guidelines. For example, these international activities, to broad tool for adequately managing liquidity measurements, limits, and guidelines systemic and adverse financial market risk. Cash flow projections can range may be specified in terms of the events. This is most applicable to from simple spreadsheets to very following measures and conditions, as institutions with complex and detailed reports depending upon the applicable: sophisticated liquidity risk profiles. complexity and sophistication of the • Cash flow projections that include • Alternative measures and institution and its liquidity risk profile discrete and cumulative cash flow conditions may be appropriate for under alternative scenarios. Given the mismatches or gaps over specified certain institutions. critical importance that assumptions future time horizons under both 13. Policies also should specify the play in constructing measures of expected and adverse business nature and frequency of management liquidity risk and projections of cash conditions. reporting. In normal business flows, institutions should ensure that environments, senior managers should the assumptions used are reasonable, • Target amounts of unencumbered receive liquidity risk reports at least appropriate, and adequately liquid asset reserves. monthly, while the board of directors documented. Institutions should • Measures used to identify unstable should receive liquidity risk reports at periodically review and formally liabilities and liquid asset coverage least quarterly. Depending upon the approve these assumptions. Institutions ratios. For example, these may include complexity of the institution’s business should focus particular attention on the ratios of wholesale funding to total mix and liquidity risk profile, assumptions used in assessing the liabilities, potentially volatile retail management reporting may need to be liquidity risk of complex assets, (e.g., high-cost or out-of-market) more frequent. Regardless of an liabilities, and off-balance-sheet deposits to total deposits, and other institution’s complexity, it should have positions. Assumptions applied to liability dependency measures, such as the ability to increase the frequency of positions with uncertain cash flows, short-term borrowings as a percent of reporting on short notice, if the need including the stability of retail and total funding. arises. Liquidity risk reports should brokered deposits and secondary market • Asset concentrations that could impart to senior management and the issuances and borrowings, are especially increase liquidity risk through a limited board a clear understanding of the important when they are used to ability to convert to cash (e.g., complex institution’s liquidity risk exposure, evaluate the availability of alternative financial instruments,12 bank-owned compliance with risk limits, consistency sources of funds under adverse between management’s strategies and contingent liquidity scenarios. Such 11 In formulating liquidity management strategies, tactics, and consistency between these scenarios include, but are not limited to, members of complex banking groups should take strategies and the board’s expressed risk deterioration in the institution’s asset into consideration their legal structures (e.g., tolerance. quality or capital adequacy. branches versus separate legal entities and 14. Institutions should consider 16. Institutions should ensure that operating subsidiaries), key business lines, markets, liquidity costs, benefits, and risks in assets are properly valued according to products, and jurisdictions in which they operate. 12 Financial instruments that are illiquid, difficult strategic planning and budgeting relevant financial reporting and to value, or marked by the presence of cash flows processes. Significant business activities supervisory standards. An institution that are irregular, uncertain, or difficult to model. should be evaluated for both liquidity should fully factor into its risk Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices 13663 management practices the consideration requirements associated with accessing consolidated level and at significant that valuations may deteriorate under the collateral given its physical location legal entities. market stress and take this into account (i.e., the custodian institution or 22. Regardless of its organizational in assessing the feasibility and impact of securities settlement system with which structure, it is important that an asset sales on its liquidity position the collateral is held). Institutions institution actively monitor and control during stress events. should also fully understand the liquidity risks at the level of individual 17. Institutions should ensure that potential demand on required and legal entities, and the group as a whole, their vulnerabilities to changing available collateral arising from various incorporating processes that aggregate liquidity needs and liquidity capacities types of contractual contingencies data across multiple systems in order to are appropriately assessed within during periods of both marketwide and develop a group-wide view of liquidity meaningful time horizons, including institution-specific stress. risk exposures. It is also important that intraday, day-to-day, short-term weekly the institution identify constraints on and monthly horizons, medium-term Management Reporting the transfer of liquidity within the horizons of up to one year, and longer- 20. Liquidity risk reports should group. term liquidity needs of one year or provide aggregate information with 23. Assumptions regarding the more. These assessments should include sufficient supporting detail to enable transferability of funds and collateral vulnerabilities to events, activities, and management to assess the sensitivity of should be described in liquidity risk strategies that can significantly strain the institution to changes in market management plans. the capability to generate internal cash. conditions, its own financial Intraday Liquidity Position Management Stress Testing performance, and other important risk factors. The types of reports or 24. Intraday liquidity monitoring is an 18. Institutions should conduct stress information and their timing will vary important component of the liquidity tests regularly for a variety of according to the complexity of the risk management process for institutions institution-specific and marketwide institution’s operations and risk profile. engaged in significant payment, events across multiple time horizons. Reportable items may include but are settlement, and clearing activities. An The magnitude and frequency of stress not limited to cash flow gaps, cash flow institution’s failure to manage intraday testing should be commensurate with projections, asset and funding liquidity effectively, under normal and the complexity of the financial concentrations, critical assumptions stressed conditions, could leave it institution and the level of its risk used in cash flow projections, key early unable to meet payment and settlement exposures. Stress test outcomes should be used to identify and quantify sources warning or risk indicators, funding obligations in a timely manner, of potential liquidity strain and to availability, status of contingent funding adversely affecting its own liquidity analyze possible impacts on the sources, or collateral usage. Institutions position and that of its counterparties. institution’s cash flows, liquidity should also report on the use of and Among large, complex organizations, position, profitability, and solvency. availability of government support, such the interdependencies that exist among Stress tests should also be used to as lending and guarantee programs, and payment systems and the inability to ensure that current exposures are implications on liquidity positions, meet certain critical payments has the consistent with the financial particularly since these programs are potential to lead to systemic disruptions institution’s established liquidity risk generally temporary or reserved as a that can prevent the smooth functioning tolerance. Management’s active source for contingent funding. of all payment systems and money involvement and support is critical to markets. Therefore, institutions with Liquidity Across Currencies, Legal the effectiveness of the stress testing material payment, settlement and Entities, and Business Lines process. Management should discuss clearing activities should actively the results of stress tests and take 21. A depository institution should manage their intraday liquidity remedial or mitigating actions to limit actively monitor and control liquidity positions and risks to meet payment and the institution’s exposures, build up a risk exposures and funding needs settlement obligations on a timely basis liquidity cushion, and adjust its within and across currencies, legal under both normal and stressed liquidity profile to fit its risk tolerance. entities, and business lines. Also, conditions. Senior management should The results of stress tests should also depository institutions should take into develop and adopt an intraday liquidity play a key role in shaping the account operational limitations to the strategy that allows the institution to: institution’s contingency planning. As transferability of liquidity, and should • Monitor and measure expected such, stress testing and contingency maintain sufficient liquidity to ensure daily gross liquidity inflows and planning are closely intertwined. compliance during economically outflows. stressed periods with applicable legal • Manage and mobilize collateral Collateral Position Management and regulatory restrictions on the when necessary to obtain intraday 19. An institution should have the transfer of liquidity among regulated credit. ability to calculate all of its collateral entities. The degree of centralization in • Identify and prioritize time-specific positions in a timely manner, including managing liquidity should be and other critical obligations in order to the value of assets currently pledged appropriate for the depository meet them when expected. relative to the amount of security institution’s business mix and liquidity • Settle other less critical obligations required and unencumbered assets risk profile.13 The agencies expect as soon as possible. available to be pledged. An institution’s depository institutions to maintain • Control credit to customers when level of available collateral should be adequate liquidity both at the necessary. monitored by legal entity, jurisdiction, • Ensure that liquidity planners and currency exposure, and systems 13 Institutions subject to multiple regulatory understand the amounts of collateral should be capable of monitoring shifts jurisdictions should have management strategies and liquidity needed to perform and processes that recognize the potential between intraday and overnight or term limitations of liquidity transferability, as well as the payment-system obligations when collateral usage. An institution should need to meet the liquidity requirements of foreign assessing the organization’s overall be aware of the operational and timing jurisdictions. liquidity needs. 13664 Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices Diversified Funding sources of wholesale funds are critical 30. Management should ensure that for smaller, less complex institutions. unencumbered, highly liquid assets are 25. An institution should establish a 28. An institution should identify readily available and are not pledged to funding strategy that provides effective alternative sources of funding that payment systems or clearing houses. diversification in the sources and tenor strengthen its capacity to withstand a The quality of unencumbered liquid of funding. It should maintain an variety of severe institution-specific and assets is important as it will ensure ongoing presence in its chosen funding marketwide liquidity shocks. Depending accessibility during the time of most markets and strong relationships with upon the nature, severity, and duration need. An institution could use its funds providers to promote effective of the liquidity shock, potential sources holdings of high-quality securities, for diversification of funding sources. An of funding include, but are not limited example, U.S. Treasury securities, institution should regularly gauge its to, the following: securities issued by U.S. government- capacity to raise funds quickly from • Deposit growth. sponsored agencies, excess reserves at each source. It should identify the main • Lengthening maturities of the central bank or similar instruments, factors that affect its ability to raise liabilities. and enter into repurchase agreements in funds and monitor those factors closely • Issuance of debt instruments.14 response to the most severe stress to ensure that estimates of fund raising • Sale of subsidiaries or lines of scenarios. capacity remain valid. business. 26. An institution should diversify • Asset securitization. Contingency Funding Plan 15 • Sale (either outright or through 31. All financial institutions, available funding sources in the short- repurchase agreements) or pledging of regardless of size and complexity, , medium-, and long-term. liquid assets. should have a formal CFP that clearly Diversification targets should be part of • Drawing down committed facilities. the medium- to long-term funding plans sets out the strategies for addressing • Borrowing. and should be aligned with the liquidity shortfalls in emergency budgeting and business planning Cushion of Liquid Assets situations. A CFP should delineate process. Funding plans should take into 29. Liquid assets are an important policies to manage a range of stress account correlations between sources of source of both primary (operating environments, establish clear lines of funds and market conditions. Funding liquidity) and secondary (contingent responsibility, and articulate clear should also be diversified across a full liquidity) funding at many institutions. implementation and escalation range of retail as well as secured and Indeed, a critical component of an procedures. It should be regularly tested unsecured wholesale sources of funds, institution’s ability to effectively and updated to ensure that it is consistent with the institution’s respond to potential liquidity stress is operationally sound. For certain sophistication and complexity. the availability of a cushion of highly components of the CFP, affirmative Management should also consider the liquid assets without legal, regulatory, testing (e.g., liquidation of assets) may funding implications of any government or operational impediments (i.e., be impractical. In these instances, programs or guarantees it uses. As with unencumbered) that can be sold or institutions should be sure to test wholesale funding, the potential pledged to obtain funds in a range of operational components of the CFP. For unavailability of government programs stress scenarios. These assets should be example, ensuring that roles and over the intermediate- and long-tem held as insurance against a range of responsibilities are up-to-date and should be fully considered in the liquidity stress scenarios including appropriate; ensuring that legal and development of liquidity risk those that involve the loss or operational documents are up-to-date management strategies, tactics, and risk impairment of typically available and appropriate; and ensuring that cash tolerances. Funding diversification unsecured and/or secured funding and collateral can be moved where and should be implemented using limits sources. The size of the cushion of such when needed, and ensuring that addressing counterparties, secured high-quality liquid assets should be contingent liquidity lines can be drawn versus unsecured market funding, supported by estimates of liquidity when needed. instrument type, securitization vehicle, needs performed under an institution’s 32. Contingent liquidity events are and geographic market. In general, stress testing as well as aligned with the unexpected situations or business funding concentrations should be risk tolerance and risk profile of the conditions that may increase liquidity avoided. Undue over-reliance on any institution. Management estimates of risk. The events may be institution- one source of funding is considered an liquidity needs during periods of stress specific or arise from external factors unsafe and unsound practice. should incorporate both contractual and and may include: • The institution’s inability to fund 27. An essential component of noncontractual cash flows, including asset growth. ensuring funding diversity is the possibility of funds being • The institution’s inability to renew maintaining market access. Market withdrawn. Such estimates should also or replace maturing funding liabilities. access is critical for effective liquidity assume the inability to obtain unsecured • Customers unexpectedly exercising risk management as it affects both the and uninsured funding as well as the options to withdraw deposits or exercise ability to raise new funds and to loss or impairment of access to funds off-balance-sheet commitments. liquidate assets. Senior management secured by assets other than the safest, • Changes in market value and price should ensure that market access is most liquid assets. volatility of various asset types. being actively managed, monitored, and • Changes in economic conditions, 14 Federally insured credit unions can borrow tested by the appropriate staff. Such market perception, or dislocations in the funds (which includes issuing debt) as given in efforts should be consistent with the section 106 of the Federal Credit Union Act financial markets. institution’s liquidity risk profile and (FCUA). Section 106 of the FCUA as well as section sources of funding. For example, access 741.2 of the NCUA Rules and Regulations establish 15 Financial institutions that have had their to the capital markets is an important specific limitations on the amount that can be liquidity supported by temporary government borrowed. Federal Credit Unions can borrow from programs administered by the Department of the consideration for most large complex natural persons in accordance with the Treasury, Federal Reserve and/or FDIC should not institutions, whereas the availability of requirements of part 701.38 of the NCUA Rules and base their liquidity strategies on the belief that such correspondent lines of credit and other Regulations. programs will remain in place indefinitely. Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices 13665 • Disturbances in payment and events that, while relatively infrequent, to measure the institution’s ability to settlement systems due to operational or could significantly impact the fund operations. Common tools to local disasters. institution’s operations. A CFP should: assess funding mismatches include: 33. Insured institutions should be • Identify Stress Events. Stress events Æ Liquidity gap analysis—A cash flow prepared for the specific contingencies are those that may have a significant report that essentially represents a base that will be applicable to them if they impact on the institution’s liquidity case estimate of where funding become less than Well Capitalized given its specific balance-sheet surpluses and shortfalls will occur over pursuant to Prompt Correction Action structure, business lines, organizational various future time frames. (PCA) provisions under the Federal structure, and other characteristics. Æ Stress tests—A pro forma cash flow Deposit Insurance Corporation Possible stress events may include report with the ability to estimate future Improvement Act.16 Contingencies may deterioration in asset quality, changes in funding surpluses and shortfalls under include restricted rates paid for agency credit ratings, PCA capital various liquidity stress scenarios and deposits, the need to seek approval from categories and CAMELS 19 ratings the institution’s ability to fund expected the FDIC/NCUA to accept brokered downgrades, widening of credit default asset growth projections or sustain an deposits, and the inability to accept any spreads, operating losses, declining orderly liquidation of assets under brokered deposits.17 financial institution equity prices, various stress events. 34. A CFP provides a documented negative press coverage, or other events • Identify Potential Funding Sources. framework for managing unexpected that may call into question an Because liquidity pressures may spread liquidity situations. The objective of the institution’s ability to meet its from one funding source to another CFP is to ensure that the institution’s obligations. during a significant liquidity event, sources of liquidity are sufficient to • Assess Levels of Severity and institutions should identify alternative fund normal operating requirements Timing. The CFP should delineate the sources of liquidity and ensure ready under contingent events. A CFP also various levels of stress severity that can access to contingent funding sources. In identifies alternative contingent occur during a contingent liquidity some cases, these funding sources may liquidity resources 18 that can be event and identify the different stages rarely be used in the normal course of employed under adverse liquidity for each type of event. The events, business. Therefore, institutions should circumstances. An institution’s CFP stages, and severity levels identified conduct advance planning and periodic should be commensurate with its should include temporary disruptions, testing to ensure that contingent funding complexity, risk profile, and scope of as well as those that might be more sources are readily available when operations. As macroeconomic and intermediate term or longer-term. needed. institution-specific conditions change, Institutions can use the different stages • Establish Liquidity Event CFPs should be revised to reflect these or levels of severity identified to design Management Processes. The CFP should changes early-warning indicators, assess provide for a reliable crisis management 35. Contingent liquidity events can potential funding needs at various team and administrative structure, range from high-probability/low-impact points in a developing crisis, and including realistic action plans used to events to low-probability/high-impact specify comprehensive action plans. execute the various elements of the plan events. Institutions should incorporate The length of the scenario will be for given levels of stress. Frequent planning for high-probability/low- determined by the type of stress event communication and reporting among impact liquidity risks into the day-to- being modeled and should encompass team members, the board of directors, day management of sources and uses of the duration of the event. and other affected managers optimize funds. Institutions can generally • Assess Funding Sources and Needs. the effectiveness of a contingency plan accomplish this by assessing possible A critical element of the CFP is the during an adverse liquidity event by variations around expected cash flow quantitative projection and evaluation ensuring that business decisions are projections and providing for adequate of expected funding needs and funding coordinated to minimize further liquidity reserves and other means of capacity during the stress event. This disruptions to liquidity. Such events raising funds in the normal course of entails an analysis of the potential may also require the daily computation business. In contrast, all financial erosion in funding at alternative stages of regular liquidity risk reports and institution CFPs will typically focus on or severity levels of the stress event and supplemental information. The CFP the potential cash flow mismatches that should provide for more frequent and 16 See 12 U.S.C. 1831o; 12 CFR 6 (OCC), 12 CFR may occur during the various stress more detailed reporting as the stress 208.40 (FRB), 12 CFR 325.101 (FDIC), and 12 CFR levels. Management should base such situation intensifies. 565 (OTS) and 12 U.S.C. 1790d; 12 CFR 702 analysis on realistic assessments of the • Establish a Monitoring Framework (NCUA). for Contingent Events. Institution 17 Section 38 of the FDI Act (12 U.S.C. 1831o) behavior of funds providers during the event and incorporate alternative management should monitor for requires insured depository institutions that are not well capitalized to receive approval prior to contingency funding sources. The potential liquidity stress events by using engaging in certain activities. Section 38 restricts or analysis also should include all material early-warning indicators and event prohibits certain activities and requires an insured on- and off-balance-sheet cash flows and triggers. The institution should tailor depository institution to submit a capital restoration these indicators to its specific liquidity plan when it becomes undercapitalized. Section their related effects. The result should 216 of the Federal Credit Union Act and part 702 be a realistic analysis of cash inflows, risk profile. The early recognition of of the NCUA Rules and Regulations establish the outflows, and funds availability at potential events allows the institution to requirements and restrictions for federally insured different time intervals during the position itself into progressive states of credit unions under Prompt Corrective Action. For readiness as the event evolves, while brokered, nonmember deposits, additional potential liquidity stress event in order restrictions apply to federal credit unions as given providing a framework to report or in parts 701.32 and 742 of the NCUA Rules and 19 Federally insured credit unions are evaluated communicate within the institution and Regulations. using the ‘‘CAMEL’’ rating system, which is to outside parties. Early-warning signals 18 There may be time constraints, sometimes substantially similar to the ‘‘CAMELS’’ system may include, but are not limited to, lasting weeks, encountered in initially establishing without the ‘‘S’’ component for rating Sensitivity to lines with FRB and/or FHLB. As a result, financial market risk. Information on NCUA’s rating system negative publicity concerning an asset institutions should plan to have these lines set up can be found in Letter to Credit Unions 07–CU–12, class owned by the institution, well in advance. CAMEL Rating System. increased potential for deterioration in 13666 Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices the institution’s financial condition, be subject to stress tests since and evaluates the various components widening debt or credit default swap devaluations or market uncertainty of the institution’s liquidity risk spreads, and increased concerns over could reduce the amount of contingent management process. These reviews the funding of off-balance-sheet items. funding that can be obtained from should assess the extent to which the 36. To mitigate the potential for pledging a given asset. Additionally, institution’s liquidity risk management reputation contagion, effective triggering events should be understood complies with both supervisory communication with counterparties, and monitored by liquidity managers. guidance and industry sound practices, credit-rating agencies, and other 39. Institutions should test various taking into account the level of stakeholders when liquidity problems elements of the CFP to assess their sophistication and complexity of the arise is of vital importance. Smaller reliability under times of stress. institution’s liquidity risk profile.20 institutions that rarely interact with the Institutions that rarely use the type of Smaller, less-complex institutions may media should have plans in place for funds they identify as standby sources achieve independence by assigning this how they will manage press inquiries of liquidity in a stress situation, such as responsibility to the audit function or that may arise during a liquidity event. the sale or securitization of loans, other qualified individuals independent In addition, groupwide contingency securities repurchase agreements, of the risk management process. The funding plans, liquidity cushions, and Federal Reserve discount window independent review process should multiple sources of funding are borrowing, or other sources of funds, report key issues requiring attention mechanisms that may mitigate should periodically test the operational including instances of noncompliance reputation concerns. elements of these sources to ensure that to the appropriate level of management 37. In addition to early-warning they work as anticipated. However, for prompt corrective action consistent indicators, institutions that issue public institutions should be aware that during with approved policy. debt, use warehouse financing, real stress events, prior market access testing does not guarantee that these Dated: March 3, 2010. securitize assets, or engage in material funding sources will remain available John C. Dugan, over-the-counter derivative transactions typically have exposure to event triggers within the same time frames and/or on Comptroller of the Currency. embedded in the legal documentation the same terms. By order of the Board of Governors of the governing these transactions. 40. Larger, more complex institutions Federal Reserve System, March 15, 2010. can benefit by employing operational Institutions that rely upon brokered Jennifer J. Johnson, simulations to test communications, deposits should also incorporate PCA- Secretary of the Board. coordination, and decision making related downgrade triggers into their involving managers with different Dated at Washington, DC, the 4th day of CFPs since a change in PCA status could responsibilities, in different geographic March 2010. have a material bearing on the locations, or at different operating By order of the Federal Deposit Insurance availability of this funding source. subsidiaries. Simulations or tests run Corporation. Contingent event triggers should be an late in the day can highlight specific Valerie J. Best, integral part of the liquidity risk problems such as difficulty in selling monitoring system. Institutions that Assistant Executive Secretary. assets or borrowing new funds at a time originate and/or purchase loans for asset when business in the capital markets Dated: March 16, 2010. securitization programs pose heightened may be less active. By the Office of Thrift Supervision. liquidity risk concerns due to the Internal Controls John E. Bowman, unexpected funding needs associated with an early amortization event or Acting Director. 41. An institution’s internal controls disruption of warehouse funding. consist of procedures, approval Dated: March 4, 2010. Institutions that securitize assets should processes, reconciliations, reviews, and By the National Credit Union have liquidity contingency plans that other mechanisms designed to provide Administration Board. address these risks. assurance that the institution manages Mary F. Rupp, 38. Institutions that rely upon secured liquidity risk consistent with board- Secretary of the Board. funding sources also are subject to approved policy. Appropriate internal [FR Doc. 2010–6137 Filed 3–19–10; 8:45 am] potentially higher margin or collateral controls should address relevant BILLING CODE 6720–01–P; 4810–33–P; 6210–01–P; requirements that may be triggered upon elements of the risk management 6714–01–P; 7535–01–P the deterioration of a specific portfolio process, including adherence to policies of exposures or the overall financial and procedures, the adequacy of risk 20 This includes the standards established in this condition of the institution. The ability identification, risk measurement, interagency guidance as well as the supporting of a financially stressed institution to reporting, and compliance with material each agency provides in its examination meet calls for additional collateral applicable rules and regulations. manuals and handbooks directed at their should be considered in the CFP. 42. Management should ensure that supervised institutions. Industry standards include those advanced by recognized industry associations Potential collateral values also should an independent party regularly reviews and groups.
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