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					Policy Statement: Funding & Liquidity Risk Management


 • Daniel J. Mashevsky, Ph.D.
         • Daniel has over 20 years of experience with financial
           institutions, which includes roles in Treasury,
           Financial Planning, Asset Liability Management,
           Market Risk and Finance. Daniel is currently the Vice
           President of Finance with VyStar Credit Union,
           Jacksonville FL, $4 billion institution. He is currently
           responsible for asset liability management, liquidity
           risk management, product profitability, organizational
           profitability, member profitability, product pricing,
           loan loss provisioning and general financial analysis.
           Daniel has a Ph.D. in Finance, MS. in Finance and BS
           in Economics.


Daniel J. Mashevsky, Ph.D.                                  2
Policy Statement: Funding & Liquidity Risk Management


 • Outline
         • Regulatory background and events leading up to
           policy statement’s need
         • Background and overview of the policy statement
         • Purpose and expectations of the policy statement
         • Outline of the key elements in a sound liquidity policy
           under the new policy statement
         • Framework for liquidity policy:
                  •   Liquidity and funding principles/standards




Daniel J. Mashevsky, Ph.D.                                         3
Policy Statement: Funding & Liquidity Risk Management

Regulatory background


  • Bank and Credit Union Regulations are generally
    responses to:
          • Financial crisis
          • Political pressures that determine the timing and
            severity of regulations
          • Economic pressures

          Key theme:
          Most regulations are reactionary and ill-timed




 Daniel J. Mashevsky, Ph.D.                                4
    Policy Statement: Funding & Liquidity Risk Management

    Regulatory background
                                                                                                            1991
                                                      Separated Banks:                                 Federal Deposit
                                                      Commercial &                                  Insurance Corporation
                                 1933
                                                      Investment                                        Improvement               2002 SOX
                           Glass-Steagall Act                                      1982
                                                                               Depository
                                                      F.D.I.C.                                                                       2010 Interagency Advisory
                                                                             Institutions Act
                                                                                                                                        On Interest Rate Risk
                                                                                                    1989
  1907                                                Regulation Q - Fed                                            1999
                                                                                                  Financial
Financial                                       1934                                                            Gramm-Leach-
                                                                                                 Institutions
  Crisis                                      Federal                  1979                                       Bliley Act
                                                                                                Deregulation
                            1929          Credit Union Act          Oil Shock,                                                                2010
               1913                                                 Prime Rate                  and Monetary                     Interagency Policy Statement on
                            Market         Created NCUA
              Federal                                                  19%,                      Control Act                        Funding & Liquidity Risk
                            Crash
            Reserve Act                                             MMF Open                                                              Management



        1900              1925             1940            1955             1970                 1985              2000            2015

                                                                                                                                            2011
                                1931                                                                                                   Consolidation of
                                Bank                                1980                                  1990                       financial regulators
                               Failures                     Depository Institutions               Comprehensive Thrift
                                                  1956
                                                              Deregulation and                     and Bank Fraud and
                                                 Bank                                                                               1994
                                                            Monetary Control Act                  Prosecution Taxpayer
                                                Holding                                                                     Reigle-Neal Interstate
                                                                                                      Recovery Act
                                                Company                                                                         Banking and
                                                   Act                            1985                                      Branching Efficiency
                                                                           Regulation Q Lifted                                       Act
                   1864                                                    No Floor on Savings
         National Bank Note Act
     (Creates Office of Comptroller of
                Currency)

     Daniel J. Mashevsky, Ph.D.                                                                                                           5
Policy Statement: Funding & Liquidity Risk Management

Regulatory background


 • Regulations over the last 100 years:
         • Financial crisis 1907(Stock & Liquidity Crisis)
                  •   J.P. Morgan (bailed out the banking system)
                        Federal Reserve Act of 1913 created government role
         • Financial crisis 1929 (Stock & Liquidity Crisis)
                  •   Fed did the wrong things
                        Glass-Stegal 1933 and many other regulations to
                          shore up confidence in Banks
         • Years of silence: 1933…1980
                  •   Hints of deregulation with BHC Act 1956




Daniel J. Mashevsky, Ph.D.                                          6
Policy Statement: Funding & Liquidity Risk Management

Regulatory background


• Regulations over the last 100 years: continued
       • Financial crisis 1979 (Oil Shocks & Inflation)
               •   Massive financial disintermediation
                     New regulations deregulating banks
                     Created financial innovations
               •   S&L Crisis (From Poorly Deregulating Thrifts)
                     More deregulations
                     Stronger regulators in OTS
       • Financial crisis 2007 (Housing Bubble & Leverage)
               •   Bernanke/Paulson/Giethner played role of J.P.Morgan 100
                   yrs later!
               •   Threats of sweeping change!


Daniel J. Mashevsky, Ph.D.                                         7
Policy Statement: Funding & Liquidity Risk Management

Regulatory background


 • Recurring theme:
         • Financial Crisis leads to Convergence of Forces

                               Politics



           Economics                      Evolution Financial Products




                             Bank Regulations
Daniel J. Mashevsky, Ph.D.                                   8
Policy Statement: Funding & Liquidity Risk Management

Regulatory background

  • Events leading up to 2007:
          • Deregulation of banks:
                   •   (Undid everything from depression)
                   •   Innovation of financial products
          • Housing bubble:
                   •   Unprecedented low interest rates
                         Very tight spreads over the risk free rate
                   •   Lax underwriting standards
                         Unprecedented demand for ABS
          • Competitive pressures:
                   •   Profits
                   •   Growth
                         Under provisioning for loan losses

 Daniel J. Mashevsky, Ph.D.                                           9
Policy Statement: Funding & Liquidity Risk Management

Regulatory background

  • Biggest outcome of the current crisis:
          • Liquidity is KING!
                   •   Capital important but cash to fund daily operations more
                       important!!
                   •   List of financial institutions that collapsed due to perceptions
                       of being illiquid:
                          – Bear Sterns
                          – Lehman Brothers
                          – Wachovia
                          – Indy Mac
                   •   Many near misses due to Contagion:
                          – I lived through one!
          • Scenario analysis will play a critical role
                   •   Federal Reserve Stress testing
                   •   Now with the interagency policy statement

 Daniel J. Mashevsky, Ph.D.                                                    10
Policy Statement: Funding & Liquidity Risk Management

Regulatory background


  • There were many warning signs:
          • Summer and fall 2008:
                   •   Wachovia and other large banks significantly raised
                       deposit rates (Level 2 liquidity crisis)
                   •   Credit default spreads were widening for these same
                       institutions
                   •   Equity and debt prices suffered shocks
                   •   Institutionally (among broker dealers) a loss of
                       confidence began

                   All classic signs of level 2 liquidity crisis that was heading
                     for level 3 and a full meltdown!
                            Always easy in hindsight!

 Daniel J. Mashevsky, Ph.D.                                               11
Policy Statement: Funding & Liquidity Risk Management

Regulatory background

 • Summary:
    • Most financial services regulation is reactionary:
                  •   Response to financial crisis
                  •   Influenced by politics, economic and finance
                        General they are ill timed
         • Interagency Policy Statement:
                  •   A response to the current crisis that focuses on:
                        – Stronger policies
                        – Comprehensive planning and strategy development
                        – Looking at the possible scenarios and their impact and
                          probability
                        – Develop plans and strategies to not be reactionary!
                        – Based on my experiences – one of the better policies

                             Help enhance safety and soundness in financial crisis

Daniel J. Mashevsky, Ph.D.                                                     12
Policy Statement: Funding & Liquidity Risk Management

 Background and overview of the policy
         • September 2008: Basel Committee on Banking
           Supervision released final draft:
                  •   “Principles for Sound Liquidity Risk Management and Supervision”
                  •   Initial draft July 2008 as the crisis was brewing
         • Not embraced by U.S. regulators
                  •   Working for an international bank: we sought principles from a
                      higher and more respected authority: Basel
         • Crisis has created unanimity among regulators:
                  •   Developed interagency policy statement on interest rate risk
                      management: January 2010
                  •   A series on different subjects:
         • Interagency:
                  •   Office of comptroller of the currency
                  •   Federal Reserve
                  •   NCUA and OTS
Daniel J. Mashevsky, Ph.D.                                                  13
Policy Statement: Funding & Liquidity Risk Management

Background and overview of the policy


  • Perspective:
          • Think about how you would handle one of these
            situations as we work through the policy statement:
                   1.     Your credit union was accidently named as a troubled
                          institution in a local paper. Your financially sound, but
                          now members are withdrawing funds! What damage
                          control steps would you take?
                   2.     Given the corporate credit union problems: your CU has a
                          large sum in a corporate that is now having problems and
                          the local press has pounced on this and thinks your CU is
                          in trouble now! Members start withdrawing funds. What
                          damage control steps would you take?



 Daniel J. Mashevsky, Ph.D.                                              14
Policy Statement: Funding & Liquidity Risk Management

Background and overview of the policy


  • Funding & Liquidity Risk Management
          • Broad application from the biggest to small financial
            institutions: all must comply
          • Intentionally vague and very prescriptive
          • Broadly define institution specific:
                   •   Liquidity sources & uses
                   •   Liquidity cushion
                   •   Liquidity measures
                   •   Governance and controls over liquidity
                   •   Most significant events that could adversely harm liquidity
                   •   Strategies to mitigate these risks
                   •   Specific action plans and steps to taken

 Daniel J. Mashevsky, Ph.D.                                             15
Policy Statement: Funding & Liquidity Risk Management

Background and overview of the policy

  • Prescriptive parts:
          • While vague must have pieces:
                   •   Governance: management, senior management and board
                   •   Develop strategies, policies and procedures and risk
                       tolerances
                   •   Document strategies and plans
                   •   Articulate risk tolerances
                   •   Develop clear policies and procedures
                   •   Liquidity risk management, monitoring and reporting
                   •   Develop a robust process to measure liquidity, stress
                       assumptions and develop scenario analysis
                   •   Look out over a proper time horizon
                   •   Stress test effects of asset valuations on liquidity
                   •   Stress testing – drive contingency funding plan

 Daniel J. Mashevsky, Ph.D.                                         16
Policy Statement: Funding & Liquidity Risk Management

Background and overview of the policy

  • Prescriptive parts: (Continued)
                   •   Analyze collateral positions and exposure due to stresses
                   •   All has to be in/or of sufficient detail to inform
                       management
                   •   Actively monitor & control liquidity risk and exposure
                   •   Manage liquidity for the institution and all subsidiaries
                       individually and as a whole (CUSOs?)
                   •   Address funding diversity: short, medium and long term
                   •   Develop liquidity cushion in highly liquid assets and
                       determine the proper size
                   •   Develop contingency funding plan
                         – All financial institutions must have one
                         – Define all possible scenarios
                         – Plans for short falls in liquidity

 Daniel J. Mashevsky, Ph.D.                                             17
Policy Statement: Funding & Liquidity Risk Management

Background and overview of the policy

  • Prescriptive parts: (Continued)
                   •   - Develop contingency funding plan
                         – Define liquidity contingency events
                             » Unexpected situation or business condition
                             » Institution specific either internal/external
                             » Unable to raise funds
                         – Prepare if it resulted in less than well capitalized
                             » Lead to prompt corrective action (PCA)
                         – Document any unexpected liquidity events
                   •   Need internal controls, procedures, approval process,
                       reconciliation, and reviews to ensure compliance with
                       Board policies
                   •   LRM process must be reviewed by an independently 3rd
                       party

 Daniel J. Mashevsky, Ph.D.                                              18
Policy Statement: Funding & Liquidity Risk Management


          Outline of the key elements in a sound liquidity
          policy under the new policy statement
         1.      Introduction
         2.      Liquidity Risk Management Framework
         3.      Liquidity Risk Measurement and Control
         4.      Contingency funding plan
         5.       Objectives/Procedures
         6.      Questions




Daniel J. Mashevsky, Ph.D.                                19
Policy Statement: Funding & Liquidity Risk Management

1.Introduction

  • Introduction:
     • Liquidity defines the credit unions ability to fund assets
        and meet obligations as they come due either by turning
        assets into cash or through borrowing funds.
     • Liquidity Risk Management (LRM) defines the institutions'
        ability to meet cash flow obligations, which are uncertain
        due to affects caused by external events and other agents’
        behavior.
     • Therefore, LRM must identify the external events and
        agent behaviors that could adversely affect liquidity and
        measure their potential impact to liquidity.
     • Liquidity management and LRM are asset liability
        management committee (ALCO) functions that protect the
        institution from adverse impacts on profits as a result of
        institution specific or market wide liquidity stresses.

 Daniel J. Mashevsky, Ph.D.                             20
Policy Statement: Funding & Liquidity Risk Management

1.Introduction

  • Liquidity and Funding Policy Statement
    Credit Union will maintain sufficient liquidity to finance loan
    commitments, repay maturating deposits and meet all other
    anticipated and unanticipated funding commitments in a fluid
    manner and at the lowest possible cost, in both normal
    operating environments as well as in environments where
    markets, industry or other economic stresses exist.

  • Liquidity and Funding Principles/Standards
  • To achieve this Liquidity and Funding Policy Statement, CU
    will adhere to four key principles:
     1.    Asset Liquidity:
     2.    Funding Diversification:
     3.    Forward Planning:
     4.    Stress Testing:
 Daniel J. Mashevsky, Ph.D.                              21
    Policy Statement: Funding & Liquidity Risk Management

1.Introduction


•          Liquidity and Funding Goals:
        1.        To economically fund daily operations of the CU.
        2.        To provide adequate funding to execute the CU’s
                  short/long term business plans.
        3.        To provide access to liquidity during adverse market
                  conditions.
        4.        To diversify funding sources.
        5.        To provide funding at reasonable costs.




    Daniel J. Mashevsky, Ph.D.                                   22
Policy Statement: Funding & Liquidity Risk Management

1.Introduction


         Liquidity and Funding Risks:
         In executing these Liquidity and Funding goals, the CU
              faces the following risks:
         1. Liquidity Mismatch Risk:
         2. Liquidity Contingency Risk:
                 a)           Liquidity option risk:
                          a)     Put option risk (anything that can prepay)
                          b)     Call Option risk (funds that can be withdrawn)
         3.          Franchise-related liquidity option risk or implied
                     option risk: (Concentrations/Business model specific)
         4.          Market Liquidity Risk:

 Daniel J. Mashevsky, Ph.D.                                                 23
Policy Statement: Funding & Liquidity Risk Management

1.Introduction

         Source of Funding & Liquidity:
             The following sources have been identified as
             integral to meeting current and future funding
             and liquidity:
                 1.           Retail deposits
                 2.           Commercial deposits
                 3.           FHLB advances
                 4.           Fed Funds lines
                 5.           Federal Reserve BIC program
                 6.           Federal Reserve discount Window
                 7.           Sale of certain assets
                 8.           Cash flows from loans and investments

 Daniel J. Mashevsky, Ph.D.                                           24
Policy Statement: Funding & Liquidity Risk Management

1.Introduction


         Uses of Funding & Liquidity:
             The following uses of funding & liquidity have
             been identified:
                 1.           Loan originations
                 2.           Investment purchases
                 3.           Deposit withdrawals
                 4.           Certificate of deposit maturities
                 5.           Capital expenditures
                 6.           Operating expenses
                 7.           Interest on deposit and other funding
                 8.           Draws on committed lines of credit

 Daniel J. Mashevsky, Ph.D.                                           25
Policy Statement: Funding & Liquidity Risk Management

2. Liquidity Risk Management Framework


        Liquidity Risk Management Framework:
            Outline the Liquidity Risk Management Framework
            that will include:
                •            Roles and responsibilities
                •            Definition of liquidity
                •            Scope of liquidity measures and contingent risks
                •            Liquidity measures
                •            Policy limits.




Daniel J. Mashevsky, Ph.D.                                             26
 Policy Statement: Funding & Liquidity Risk Management

2. Liquidity Risk Management Framework


Funding & Liquidity Risk Mgmt Governance
The Board of Directors, Executive Committee, and ALCO
(per policy with examples)

      1.        Understand principal liquidity and funding strategies
                and exposures per limits
      2.        Approve Liquidity and Funding Policies and
                Guidelines set by ALCO/EC
      3.        Approve exceptions to any guidelines
      4.        Approves Liquidity Contingency Plans




 Daniel J. Mashevsky, Ph.D.                                 27
Policy Statement: Funding & Liquidity Risk Management

2. Liquidity Risk Management Framework


Funding & Liquidity Risk Mgmt Governance
ALCO is responsible for: (per policy with examples)
      1.        Understanding liquidity including all stress scenarios
      2.        Oversight of finance and accounting in execution of
                liquidity plans
      3.        Approval of contingency funding plans and strategies
      4.        Responsible acting as the management team to
                execute strategies prescribed in contingency funding
                plans as crisis develop and critical warnings escalate




 Daniel J. Mashevsky, Ph.D.                                  28
Policy Statement: Funding & Liquidity Risk Management

2. Liquidity Risk Management Framework

Funding & Liquidity Risk Mgmt Governance
Finance and Accounting Group (per policy with examples)
   1. Assures the timeliness, transparency and adequacy of
       liquidity information that is presented to the Board, EC
       and ALCO.
   2. Principal responsibility for guiding liquidity mgmt.,
       subject to ALCO review.
   3. Ensure pricing of funding liabilities (fed funds) is
       reported to ALCO on a regular basis as these
       instruments indicate marginal funding costs.
   4. Day-to-day responsibility for funding the credit union.
   5. Execute liquidity strategies approved by ALCO
   6. Assure prudent liquidity and optimize overall funding
       costs, pricing, and assures proper diversification of
       funding sources.
 Daniel J. Mashevsky, Ph.D.                           29
Policy Statement: Funding & Liquidity Risk Management

2. Liquidity Risk Management Framework


Funding & Liquidity Risk Mgmt Governance
   Finance: (Examples but with policy specific points)
      1.        Periodic monitoring, daily if problems
      2.        Development of contingency funding plans
      3.        Develop contingency and stress tests and alternative
                scenarios
      4.        Length of horizon for liquidity projections 12-24
                months
      5.        Other liquidity related responsibilities as designated
                by ALCO



 Daniel J. Mashevsky, Ph.D.                                  30
Policy Statement: Funding & Liquidity Risk Management

3. Liquidity Risk Measurement and Control

Liquidity Triggers and Measures: (per policy with examples)
•     A set of liquidity measures
•     Early warning of potential liquidity problems
•     Calculated monthly or more frequently as necessary

        For example:
      •    Illiquid Loans/Stable Funding (Non-Sale loans and non-
           wholesale funding)
      •    Higher ratio indicate volatile funding
      •    Lower ratio indicate stable funding
           Computation: Net loans minus Loans held for sale divided by
           Deposits minus CDs > $250,000 plus FHLB Advances
                Red Flag Trigger: > 100%
      Others:
          Cash ratio: Cash + Short-Term Investments / Assets
          Debt ratio: Borrowings / Total Deposits & Net Worth
          Brokered deposits: Broker CDs/ Total Deposits (less Broker
          CDs)
 Daniel J. Mashevsky, Ph.D.                                   31
Policy Statement: Funding & Liquidity Risk Management

3. Liquidity Risk Measurement and Control


Liquidity Risk Measurement & Control: (per policy with examples)
• Liquidity Gap (Cash Flow Mismatches)
         •         Sources – uses over some time horizon
         •         Difference ~ liquidity gap
•            Net Liquid Asset Ratio
         •         Various ways to calculate
•            Structural Liquidity Position
         •         % of balance sheet in “liquid” assets ~ ST Trs/Agncy
•            Leverage Ratios
         •         Various measures


    Daniel J. Mashevsky, Ph.D.                                  32
Policy Statement: Funding & Liquidity Risk Management

3. Liquidity Risk Measurement and Control


Liquidity Risk Measurement & Control:
•   Liquidity Risk Limits: (per policy with examples)
      •            If there are liquidity measures – they need limits
               •        This would be control
                              »   Illiquid Loans/Stable Funding < 100%
                              »   Cash ratio > 5%
                              »   Debt ratio < 20%
                              »   Brokered deposits < 10%
      •            Periodic measurement
               •        Reporting back to governance structure




 Daniel J. Mashevsky, Ph.D.                                              33
Policy Statement: Funding & Liquidity Risk Management

4. Contingency funding plan

Contingency funding plan :
Definition: a comprehensive assessment of the
    possible contingent events that could adversely
    impact the institutions liquidity position. The
    plan identifies different levels of stress that
    would trigger set responses by the institution to
    these    events.   The    plan    also   identifies
    governance, key teams and communication plans.
    Procedures and steps must also be defined to
    guide the responses. This must also include
    development of corrective actions plans to
    address any and all deficiencies identified by the
    stress tests.

 Daniel J. Mashevsky, Ph.D.                    34
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan


Key Elements to a Contingency Funding Plan:   (per policy)

      1.        Contingent events
      2.        Different levels of stress
      3.        Triggers
      4.        Responses
      5.        Governance
      6.        key teams
      7.        Communication plans
      8.        Procedures and steps
      9.        Corrective actions plans



 Daniel J. Mashevsky, Ph.D.                     35
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan

1.      Contingent events (per policy)
      •   High impact low probability
               •        Identify stress events: materially impact liquidity or BS,
                        deteriorating credit quality, credit change, PCA and camel
                        downgrade, operating losses, negative press, or reputation
                        damage
                       •    Example: Interest rates rise like ’94 or ‘02
      •            Low impact high probability
               •        Identify stress events: highly likely events that would not
                        materially impact the institution
                       •    Example: Interest rates stay low for 12-24 months
      •            Needs to specify in general terms what should be
                   included

      Need to think through all possibilities and develop non- zero
         probability events
 Daniel J. Mashevsky, Ph.D.                                            36
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan

2. Different levels of stress (per policy but interpreted)
Generally identify 3 levels of stress and the potential impact on
      your CU be very specific!
      “Normal operations” within range: move out of range:
      Level 1: define characteristics and impacts
        ~ Problems brewing no real impact early warning sighs of
      a problem. Monitor and communicate
      Level 2 define characteristics and impacts
        ~ Warnings correct ~ lose deposits and implement plans.
      Begin damage control
      Level 3 define characteristics and impacts
        ~ Disaster is imminent trying to save the institution!
      Systematic bank crisis: define characteristics and impacts
        ~ Implement action plans, monitor and communicate daily
 Daniel J. Mashevsky, Ph.D.                           37
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan


3. Responses for each crisis levels and as triggers hit:
         (per policy)

         Who gets notified?
         Frequency of communication?
         Assembling action teams?
         ALCO runs a war room?
         Daily communication to Board & ALCO?




 Daniel J. Mashevsky, Ph.D.                     38
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan.4.Responses

Level 1 Crisis:               (levels required per policy but interpreted with examples)

      •            ALCO and Board notified
      •            Weekly communication to ALCO
      •            Measuring & Monitoring increase to daily/weekly
      •            If events escalate & appears eminent move to level 2
               •        Daily communications
               •        Assemble response teams
               •        ALCO creates war room for monitoring and managing as events unfold
               •        Begin internal & external communications
               •        Institutional response:
                       –      Begin to draw all available FHLB advances with LT structure
                       –      Take in $X of long term Brokered CDs
                       –      Do not change deposit pricing
                       –      Ensure contingent funding setup with secured lines




 Daniel J. Mashevsky, Ph.D.                                                                39
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan.4.Responses

Level 2 Crisis: (levels required per policy but interpreted with examples)
Come through level 1
      •            Daily communications
      •            Assemble response teams
      •            ALCO creates war room for daily monitoring and
                   managing as events unfold
      •            Begin internal & external communications
      •            Begin to see deposit runoff
      •            Collateral requirements escalate
      •            Institutional response:
               •        Pay 25 basis point higher rate on all CDs
               •        Pay a premium on money market accounts
               •        Unsecured lines cut, look for contingent funding

 Daniel J. Mashevsky, Ph.D.                                                  40
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan.4.Responses


Level 3 Crisis: (levels required per policy but interpreted with examples)
      •         Come through level 2
      •         Heavy deposit withdrawals
      •         General loss of confidence
      •         Trying to keep the institution alive
      •         Paying significant deposit premiums on deposits
      •         Lines of credit have been cut
      •         Collateral requirements are punitive
      •         Trying to sell assets as funding evaporates
      •         Being looking for a friendly merger



 Daniel J. Mashevsky, Ph.D.                                                  41
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan.4.Responses


Systemic Crisis: (levels required per policy but interpreted with examples)
      •            Monitor & control daily
      •            General loss of confidence in financial institutions
      •            Liquidity evaporates
      •            Deposits rate escalate as premiums rise & liquidity
                   down
      •            Begin communicating your financial strength:
               •        Internally
               •        Externally to stake holders
      •            Lines of credit have been cut
      •            Collateral requirements rise


 Daniel J. Mashevsky, Ph.D.                                                   42
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan

5. Governance                 (per policy but assigned responsibility to Finance)

      •            Finance: responsibility for:
               •        monitoring liquidity & triggers ~ identifying early
                        warning signs
      •            ALCO: responsible for:
               •        Approving and understanding the CFP
               •        Monitoring & control CFP, funding & LRM
               •        Communications:
                           »    Board
                           »    Internal/External stakeholders
               •        Managing at different crisis levels
      •            Board of Directors: responsible for understanding
               •        Funding & liquidity risk management
               •        CFP
               •        Monitor & Control


 Daniel J. Mashevsky, Ph.D.                                                         43
 Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan


6. key teams ~ composition and specific responsibility
(per policy but with examples)

•        ALCO (Executive team, key senior leaders)
•        Asset sales team (Key personnel)
•        Funding team (key personnel)
•        Contingent liability team (key personnel)




 Daniel J. Mashevsky, Ph.D.                          44
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan


7. Communication plans for each crisis level:
          (per policy but interpreted)

      •            What is the plan to communicate
               •        What information will be shared
               •        Prepare a preliminary statement
               •        Select a spokesperson




 Daniel J. Mashevsky, Ph.D.                               45
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan

8. Procedures and steps for each crisis level
          (per policy but interpreted)

      •         When does Finance identify a crisis
      •         How is this communicate and to whom
      •         What is the response of the whom

            “liquidity event management process: realistic crisis
              management team and administrative structure
              including realistic action plans used to execute
              different elements of the CFP at different stress
              levels.” This should facilitate communication and
              indicate frequency of communication, which would go
              to daily if events deteriorate and warrant.”

 Daniel J. Mashevsky, Ph.D.                            46
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan


9. Corrective actions plans                 (per policy but interpreted)

      •            Identify deficiency
      •            Develop a solution (action plan)
               •        Some solutions can’t be found
               •        New problem~ concentration/diversification risk with
                        Fed/FHLB!
      •            Execute the plan
      •            Provide feed back that the plan has been completed
                   and the deficiency gets corrected




 Daniel J. Mashevsky, Ph.D.                                                47
Policy Statement: Funding & Liquidity Risk Management

4. Contingency Funding Plan


Summary Contingency Funding Plan:               (per policy)

      1.        Define frequency of update & review/approval process
      2.        Contingent events
      3.        Different levels of stress
      4.        Triggers
      5.        Responses
      6.        Governance
      7.        key teams
      8.        Communication plans
      9.        Procedures and steps
      10.       Corrective actions plans

 Daniel J. Mashevsky, Ph.D.                                    48
Policy Statement: Funding & Liquidity Risk Management


Summary Policy Statement:
     1.        Joint statement by regulators
     2.        Allows for fairly wide latitude in implementation
     3.        Prescribe key components that are required
     4.        We have provide some guidance for interpreting key
               elements with examples
     5.        Have a solid policy and CFP are critical elements that
               are necessary in our brave new world

               Our hope is that this type of broad scenario thinking
               permeates all facets of operations and particularly
               ALM.

Daniel J. Mashevsky, Ph.D.                                 49
Policy Statement: Funding & Liquidity Risk Management




Daniel J. Mashevsky, Ph.D.                     50