Proposed Guidance - Funding and Liquidity Risk Management

Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices
DATES: Written comments should be
received on or before September 4, 2009
to be assured of consideration.
ADDRESSES: Direct all written comments
to R. Joseph Durbala, Internal Revenue
Service, Room 6129, 1111 Constitution
Avenue, NW., Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT:
Requests for additional information or
copies of the form and instructions
should be directed to Dawn Bidne at
Internal Revenue Service, Room 6129,
1111 Constitution Avenue, NW.,
Washington, DC 20224, or at (202) 622–
3933, or through the Internet at
Dawn.E.Bidne@irs.gov.

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SUPPLEMENTARY INFORMATION:

Title: Excise Tax on Structured
Settlement Factoring Transactions.
OMB Number: 1545–1826.
Form Number: 8876.
Abstract: Form 8876 is used to report
structured settlement transactions and
pay the applicable excise tax.
Current Actions: There are no changes
being made to the form at this time.
Type of Review: Extension of a
currently approved collection.
Affected Public: Business or other forprofit organizations and individuals.
Estimated Number of Respondents:
100.
Estimated Time per Respondent: 5
hours, 36 minutes.
Estimated Total Annual Burden
Hours: 560.
The following paragraph applies to all
of the collections of information covered
by this notice:
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid OMB control number.
Books or records relating to a collection
of information must be retained as long
as their contents may become material
in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential,
as required by 26 U.S.C. 6103.
Request for Comments: Comments
submitted in response to this notice will
be summarized and/or included in the
request for OMB approval. All
comments will become a matter of
public record.
Comments are invited on: (a) Whether
the collection of information is
necessary for the proper performance of
the functions of the agency, including
whether the information shall have
practical utility; (b) the accuracy of the
agency’s estimate of the burden of the
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information to be collected; (d)
ways to minimize the burden of the

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collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and (e) estimates of capital or start-up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
Approved: June 22, 2009.
R. Joseph Durbala,
IRS Reports Clearance Officer.
[FR Doc. E9–15725 Filed 7–2–09; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket ID OCC–2009–0009]

FEDERAL RESERVE SYSTEM
[Docket No. OP–1362]

FEDERAL DEPOSIT INSURANCE
CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS–2009–0011]

NATIONAL CREDIT UNION
ADMINISTRATION
Proposed Interagency Guidance—
Funding and Liquidity Risk
Management
AGENCIES: 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: Notice with request for
comment.
SUMMARY: The OCC, FRB, FDIC, OTS,
and NCUA (the Agencies) in
conjunction with the Conference of
State Bank Supervisors (CSBS), request
comment on the proposed guidance on
funding and liquidity risk management
(proposed Guidance). The proposed
Guidance summarizes the principles of
sound liquidity risk management that
the agencies have issued in the past and,
where appropriate, brings them into
conformance with the ‘‘Principles for
Sound Liquidity Risk Management and
Supervision’’ issued by the Basel
Committee on Banking Supervision
(BCBS) in September 2008. While the
BCBS liquidity principles primarily
focuses on large internationally active

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financial institutions, the proposed
guidance emphasizes supervisory
expectations for all domestic financial
institutions including banks, thrifts and
credit unions.
DATES: Comments must be submitted on
or before September 4, 2009.
ADDRESSES: Comments should be
directed to:
OCC: Because paper mail in the
Washington, DC area and at the
Agencies is subject to delay,
commenters are encouraged to submit
comments by e-mail, if possible. Please
use the title ‘‘Proposed Interagency
Guidance—Funding and Liquidity Risk
Management’’ to facilitate the
organization and distribution of the
comments. You may submit comments
by any of the following methods:
• E-mail:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E
Street, SW., Mail Stop 2–3, Washington,
DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2009–0009’’ in your comment.
In general, OCC will enter all comments
received into the docket without
change, including any business or
personal information that you provide
such as name and address information,
e-mail addresses, or phone numbers.
Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
notice by any of the following methods:
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street,
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
FRB: You may submit comments,
identified by Docket No. OP–1362, by
any of the following methods:

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32036

Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices

• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Fax: 202/452–3819 or 202/452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the FRB’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed in electronic or
paper form in Room MP–500 of the
FRB’s Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m.
on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Agency Web Site: http://
www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting
comments on the Agency Web site.
• E-mail: Comments@FDIC.gov.
Include ‘‘Proposed Interagency
Guidance—Funding and Liquidity
Management Risk’’ in the subject line of
the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
(EST).
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
Public Inspection: All comments
received will be posted without change
to http://www.fdic.gov/regulations/laws/
federal, including any personal
information provided. Comments may
be inspected and photocopied in the
FDIC Public Information Center, 3501
North Fairfax Drive, Room E–1002,
Arlington, VA 22226, between 9 a.m.
and 5 p.m. (EST) on business days.
Paper copies of public comments may
be ordered from the Public Information
Center by telephone at (877) 275–3342
or (703) 562–2200.

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OTS: You may submit comments,
identified by OTS–2009–0011, by any of
the following methods:
• E-mail address:
regs.comments@ots.treas.gov. Please
include ID OTS–2009–0011 in the
subject line of the message and include
your name and telephone number in the
message.
• Fax: (202) 906–6518.
• Mail: Regulation Comments, Chief
Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552, Attention: ID
OTS–2009–0011.
• Hand Delivery/Courier: Guard’s
Desk, East Lobby Entrance, 1700 G
Street, NW., from 9 a.m. to 4 p.m. on
business days, Attention: Regulation
Comments, Chief Counsel’s Office,
Attention: ID OTS–2009–0011.
Instructions: All submissions received
must include the agency name and
docket number for this notice. All
comments received will be posted to the
OTS Internet Site at http://www.ots.
treas.gov/Supervision&Legal.Laws&
Regulations without change, including
any personal information provided.
Comments including attachments and
other supporting materials received are
part of the public record and subject to
public disclosure. Do not enclose any
information in your comments or
supporting materials that you consider
confidential or inappropriate for public
disclosure.
• Viewing Comments On-Site: You
may inspect comments at the Public
Reading Room, 1700 G Street, NW., by
appointment. To make an appointment
for access, call (202) 906–5922, send an
e-mail to public.info@ots.treas.gov, or
send a facsimile transmission to (202)
906–6518. (Prior notice identifying the
materials you will be requesting will
assist us in serving you.) We schedule
appointments on business days between
10 a.m. and 4 p.m. In most cases,
appointments will be available the next
business day following the date we
receive a request.
NCUA: You may submit comments by
any of the following methods (Please
send comments by one method only):
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
NCUA Web Site: http://
www.ncua.gov/Resources/
RegulationsOpinionsLaws/
ProposedRegulations.aspx. Follow the
instructions for submitting comments.
• E-mail: Address to
regcomments@ncua.gov. Include ‘‘[Your
name] Comments on Proposed
Interagency Guidance—Funding and
Liquidity Risk Management,’’ in the
e-mail subject line.

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• Fax: (703) 518–6319. Use the
subject line described above for e-mail.
• Mail: Address to Mary F. Rupp,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
Public inspection: All public
comments are available on the agency’s
Web site at http://www.ncua.gov/
Resources/RegulationsOpinionsLaws/
ProposedRegulations.aspx as submitted,
except as may not be possible for
technical reasons. Public comments will
not be edited to remove any identifying
or contact information. Paper copies of
comments may be inspected in NCUA’s
law library, at 1775 Duke Street,
Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m.
and 3 p.m. To make an appointment,
call (703) 518–6546 or send an e-mail to
OGC Mail @ncua.gov.
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.
FRB: James Embersit, Deputy
Associate Director, Market and
Liquidity Risk, 202–452–5249 or Mary
Arnett, Supervisory Financial Analyst,
Market and Liquidity Risk, 202–721–
4534 or Brendan Burke, Supervisory
Financial Analyst, Supervisory Policy
and Guidance, 202–452–2987
FDIC: Kyle Hadley, Chief Capital
Markets Examination Support, (202)
898–6532.
OTS: Jeff Adams, Capital Markets
Specialist, Risk Modeling and Analysis,
(202) 906–6388 or Marvin Shaw, Senior
Attorney, Regulations and Legislation
Division, (202) 906–6639.
NCUA: John Bilodeau, Program
Officer, Examination and Insurance,
(703) 518–6618.
SUPPLEMENTARY INFORMATION:
I. Background
The recent turmoil in the financial
markets emphasizes the importance of
good liquidity risk management to the
safety and soundness of financial
institutions. Supervisors worked on an
international and national level through
various groups (e.g., Basel Committee on
Banking Supervision, Senior
Supervisors Group, Financial Stability
Forum) to assess the implications from
the current market conditions on an
institution’s assessment of liquidity risk
and the supervisor’s approach to
liquidity risk supervision. The industry

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Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices
through the Institute of International
Finance (IIF) also performed work in the
area of liquidity risk and issued
guidelines in 2008. Additionally,
supervisors in Europe and Asia have
also worked on domestic liquidity
guidance. This guidance focuses on all
domestic financial institutions,
including banks, thrifts, and credit
unions. The proposed guidance
emphasizes the key elements of
liquidity risk management already
addressed separately by the agencies,
and provides consistent interagency
expectations on sound practices for
managing funding and liquidity risk.

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II. Request for Comment
The agencies request comments on all
aspects of the proposed guidance.
III. Paperwork Reduction Act
In accordance with section 3512 of
the Paperwork Reduction Act of 1995,
44 U.S.C. 3501–3521 (PRA), the
Agencies may not conduct or sponsor,
and the respondent is not required to
respond to, an information collection
unless it displays a currently valid
Office of Management and Budget
(OMB) control number.
Comments are invited on:
(a) Whether the collection of
information is necessary for the proper
performance of the Federal banking
agencies’ functions, including whether
the information has practical utility;
(b) The accuracy of the estimates of
the burden of the information
collection, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record. Comments should be
addressed to:
OCC: Please follow the instructions
found in the ADDRESSES caption above
for submitting comments.
FRB: Please follow the instructions
found in the ADDRESSES caption above
for submitting comments.
FDIC: Interested parties are invited to
submit written comments to the FDIC by
any of the following methods. All
comments should refer to the name of
the collection:
• http://www.FDIC.gov/regulations/
laws/federal/notices.html

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• E-mail: comments@fdic.gov Include
the name of the collection in the subject
line of the message.
• Mail: Leneta G. Gregorie (202–898–
3719), Counsel, Room F–1064, Federal
Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
• Hand Delivery: Comments may be
hand-delivered to the guard station at
the rear of the 17th Street Building
(located on F Street), on business days
between 7 a.m. and 5 p.m.
OTS: Please follow the instructions
found in the ADDRESSES caption above
for submitting comments.
NCUA: Please follow the instructions
found in the ADDRESSES caption above
for submitting comments.
All Agencies: A copy of the comments
may also be submitted to the OMB desk
officer for the Agencies: Office of
Information and Regulatory Affairs,
Office of Management and Budget, New
Executive Office Building, Washington,
DC 20503.
Title of Information Collection:
Funding and Liquidity Risk
Management.
OMB Control Numbers: New
collection; to be assigned by OMB.
Abstract: Section 14 states that
institutions should consider liquidity
costs, benefits, and risks in strategic
planning and budgeting processes.
Significant business activities should be
evaluated for liquidity risk exposure as
well as profitability. More complex and
sophisticated institutions should
incorporate liquidity costs, benefits, and
risks in the internal product pricing,
performance measurement, and new
product approval process for all
material business lines, products and
activities. Incorporating the cost of
liquidity into these functions should
align the risk-taking incentives of
individual business lines with the
liquidity risk exposure their activities
create for the institution as a whole. The
quantification and attribution of
liquidity risks should be explicit and
transparent at the line management
level and should include consideration
of how liquidity would be affected
under stressed conditions.
Section 20 would require that
liquidity risk reports provide aggregate
information with sufficient supporting
detail to enable management to assess
the sensitivity of the institution to
changes in market conditions, its own
financial performance, and other
important risk factors. Institutions
should also report on the use of and
availability of government support, such
as lending and guarantee programs, and
implications on liquidity positions,
particularly since these programs are

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generally temporary or reserved as a
source for contingent funding.
Affected Public:
OCC: National banks, their
subsidiaries, and Federal branches or
agencies of foreign banks.
FRB: Bank holding companies and
state member banks.
FDIC: Insured state nonmember
banks.
OTS: Federal savings associations and
their affiliated holding companies.
NCUA: Federally-insured credit
unions.
Type of Review: Regular.
Estimated Burden:
OCC:
Number of respondents: 1,560 total
(13 large (over $100 billion in assets), 29
mid-size ($10–$100 billion), 1,518 small
(less than $10 billion)).
Burden under Section 14: 720 hours
per large respondent, 240 hours per
mid-size respondent, and 80 hours per
small respondent.
Burden under Section 20: 4 hours per
month.
Total estimated annual burden:
212,640 hours.
FRB:
Number of respondents: 5,892 total
(26 large (over $100 billion in assets), 71
mid-size ($10–$100 billion), 5,795 small
(less than $10 billion)).
Burden under Section 14: 720 hours
per large respondent, 240 hours per
mid-size respondent, and 80 hours per
small respondent.
Burden under Section 20: 4 hours per
month.
Total estimated annual burden:
782,176 hours.
FDIC:
Number of respondents: 5,076 total
(10 large (over $20 billion in assets), 309
mid-size ($1–$20 billion), 4,757 small
(less than $1 billion)).
Burden under Section 14: 720 hours
per large respondent, 240 hours per
mid-size respondent, and 80 hours per
small respondent.
Burden under Section 20: 4 hours per
month.
Total estimated annual burden:
705,564.
OTS:
Number of respondents: 801 total (14
large (over $100 billion in assets), 104
mid-size ($10–$100 billion), 683 small
(less than $10 billion)).
Burden under Section 14: 720 hours
per large respondent, 240 hours per
mid-size respondent, and 80 hours per
small respondent.
Burden under Section 20: 4 hours per
month.
Total estimated annual burden:
128,128.
NCUA:

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Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices

Number of respondents: 7,736 total
(153 large (over $1 billion in assets), 501
mid-size ($250 million to $1 billion),
and 7,082 small (less than $250
million)).
Burden under Section 14: 240 hours
per large respondent, 80 hours per midsize respondent, and 20 hours per small
respondent.
Burden under Section 20: 2 hours per
month.
Total estimated annual burden:
404,104.
IV. Guidance
The text of the proposed Guidance on
Funding and Liquidity Risk
Management is as follows:
Interagency Guidance on Funding and
Liquidity Risk Management

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1. The Office of the Comptroller of the
Currency (OCC), Board of Governors of
the Federal Reserve System (FRB),
Federal Deposit Insurance Corporation
(FDIC), the Office of Thrift Supervision
(OTS), and the National Credit Union
Administration (NCUA) (collectively,
‘‘the agencies’’) in conjunction with the
Conference of State Bank Supervisors
(CSBS) 1 are issuing this guidance to
provide consistent interagency
expectations on sound practices for
managing funding and liquidity risk.
The guidance summarizes the principles
of sound liquidity risk management that
the agencies have issued in the past 2
and, where appropriate, brings these
principles into conformance with the
international guidance recently issued
by the Basel Committee on Banking
Supervision titled ‘‘Principles for Sound
Liquidity Risk Management and
Supervision.3
1 The various state banking supervisors may
implement this policy statement through their
individual supervisory process.
2 For national banks, see the Comptroller’s
Handbook on Liquidity. For state member banks
and bank holding companies, see the Federal
Reserve’s Commercial Bank Examination Manual
(section 4020), Bank Holding Company Supervision
Manual (section 4010), and Trading and Capital
Markets Activities Manual (section 2030). For State
non-member banks, see the FDIC’s Revised
Examination Guidance for Liquidity and Funds
Management (Trans. No. 2002–01) (Nov. 19, 2001)
as well as Financial Institution Letter 84–2008,
Liquidity Risk Management (August 2008). For
savings associations, see the Office of Thrift
Supervision’s Examination Handbook, section 530,
‘‘Cash Flow and Liquidity Management’’; and the
Holding Companies Handbook, section 600. For
credit unions, see Letter to Credit Unions No. 02–
CU–05, Examination Program Liquidity
Questionnaire (March 2002). Also see Basel
Committee on Banking Supervision, ‘‘Principles for
Sound Liquidity Risk Management and
Supervision,’’ (September 2008).
3 Basel Committee on Banking Supervision,
‘‘Principles for Sound Liquidity Risk Management
and Supervision’’, September 2008. See http://
www.bis.org/publ/bcbs144.htm. Federally-insured

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2. Recent events illustrate that
liquidity risk management at many
financial institutions is in need of
improvement. Deficiencies include
insufficient holdings of liquid assets,
funding risky or illiquid asset portfolios
with potentially volatile short-term
liabilities, and a lack of meaningful cash
flow projections and liquidity
contingency plans.
3. The following guidance reiterates
the process that institutions should
follow to appropriately identify,
measure, monitor and control their
funding and liquidity risk. In particular,
the guidance re-emphasizes the
importance of cash flow projections,
diversified funding sources, stress
testing, a cushion of liquid assets, and
a formal well-developed contingency
funding plan (CFP) as primary tools for
measuring and managing liquidity risk.
The agencies expect all financial
institutions 4 to manage liquidity risk
using processes and systems that are
commensurate with the institution’s
complexity, risk profile, and scope of
operations. Liquidity risk management
processes and plans should be well
documented and available for
supervisory review. Failure to maintain
an adequate liquidity risk management
process is considered an unsafe and
unsound practice.
Liquidity and Liquidity Risk
4. Liquidity is a financial institution’s
capacity to meet its cash and collateral
obligations at a reasonable cost.
Maintaining an adequate level of
liquidity depends on the institution’s
ability to efficiently meet both expected
and unexpected cash flows and
collateral needs without adversely
affecting either daily operations or the
financial condition of the institution.
5. Liquidity risk is the risk that an
institution’s financial condition or
overall safety and soundness is
adversely affected by an inability (or
perceived inability) to meet its
contractual obligations. An institution’s
obligations and the funding sources
used to meet them depend significantly
on its business mix, balance-sheet
structure, and the cash-flow profiles of
its on- and off-balance-sheet obligations.
In managing their cash flows,
institutions confront various situations
that can give rise to increased liquidity
credit unions are not subject to principles issued by
the Basel Committee.
4 Unless otherwise indicated, this interagency
guidance uses the term ‘‘financial institutions’’ or
‘‘institutions’’ to include banks, saving associations,
credit unions, and affiliated holding companies.
Federally-insured credit unions (FICUs) do not have
holding company affiliations and therefore
references to holding companies contained within
this guidance are not applicable to FICUs.

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risk. These include funding mismatches,
market constraints on the ability to
convert assets into cash or in accessing
sources of funds (i.e., market liquidity),
and contingent liquidity events.
Changes in economic conditions or
exposure to credit, market, operation,
legal, and reputation risks also can
affect an institution’s liquidity risk
profile and should be considered in the
assessment of liquidity and asset/
liability management.
Sound Practices of Liquidity Risk
Management
6. An institution’s liquidity
management process should be
sufficient to meet its daily funding
needs, and cover both expected and
unexpected deviations from normal
operations. Accordingly, institutions
should have a comprehensive
management process for identifying,
measuring, monitoring and controlling
liquidity risk. Because of the critical
importance to the viability of the
institution, liquidity risk management
should be fully integrated into the
institution’s risk management processes.
Critical elements of sound liquidity risk
management include:
• Effective corporate governance
consisting of oversight by the board of
directors and active involvement by
management in an institution’s control
of liquidity risk.
• Appropriate strategies, policies,
procedures, and limits used to manage
and mitigate liquidity risk.
• Comprehensive liquidity risk
measurement and monitoring systems
(including assessments of the current
and prospective cash flows or sources
and uses of funds) that are
commensurate with the complexity and
business activities of the institution.
• Active management of intraday
liquidity and collateral.
• An appropriately diverse mix of
existing and potential future funding
sources.
• Adequate levels of highly liquid
marketable securities free of legal,
regulatory, or operational impediments
that can be used to meet liquidity needs
in stressful situations.
• Comprehensive contingency
funding plans (CFPs) that sufficiently
address potential adverse liquidity
events and emergency cash flow
requirements.
• Internal controls and internal audit
processes sufficient to determine the
adequacy of the institution’s liquidity
risk management process.
Supervisors will assess these critical
elements in their reviews of an
institution’s liquidity risk management

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process in relation to its size,
complexity, and scope of operations.
Corporate Governance
7. The board of directors is ultimately
responsible for the liquidity risk
assumed by the institution. As a result,
the board should ensure that the
institution’s liquidity risk tolerance is
established and communicated in such
a manner that all levels of management
clearly understand the institution’s
approach to managing the trade-offs
between liquidity risk and profits. The
board of directors or its delegated
committee of board members should
oversee the establishment and approval
of liquidity management strategies,
policies and procedures, and review
them at least annually. In addition, the
board should ensure that it:
• Understands the nature of the
liquidity risks of its institution and
periodically reviews information
necessary to maintain this
understanding.
• Establishes executive-level lines of
authority and responsibility for
managing the institution’s liquidity risk.
• Enforces management’s duties to
identify, measure, monitor, and control
liquidity risk.
• Understands and periodically
reviews the institution’s CFPs for
handling potential adverse liquidity
events.
• Comprehends the liquidity risk
profiles of important subsidiaries and
affiliates as appropriate.
8. Senior management is responsible
for ensuring that board-approved
strategies, policies, and procedures for
managing liquidity (on both a long-term
and day-to-day basis) are appropriately
executed within the lines of authority
and responsibility designated for
managing and controlling liquidity risk.
This includes overseeing the
development and implementation of
appropriate risk measurement and
reporting systems, liquid buffers of
unencumbered marketable securities,
CFPs, and an adequate internal control
infrastructure. Senior management is
also responsible for regularly reporting
to the board of directors on the liquidity
risk profile of the institution.
9. Senior management should
determine the structure, responsibilities,
and controls for managing liquidity risk
and for overseeing the liquidity
positions of the institution. These
elements should be clearly documented
in liquidity risk policies and
procedures. For institutions comprised
of multiple entities, such elements
should be fully specified and
documented in policies for each
material legal entity and subsidiary.

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Senior management should be able to
monitor liquidity risks for each entity
across the institution on an ongoing
basis. Processes should be in place to
ensure that the group’s senior
management is actively monitoring and
quickly responding to all material
developments, and reporting to the
board of directors as appropriate.
10. Institutions should clearly identify
the individuals or committees
responsible for implementing and
making liquidity risk decisions. When
an institution uses an asset/liability
committee (ALCO) or other similar
senior management committee, the
committee should actively monitor the
institution’s liquidity profile and should
have sufficiently broad representation
across major institutional functions that
can directly or indirectly influence the
institution’s liquidity risk profile (e.g.,
lending, investment securities,
wholesale and retail funding, etc.).
Committee members should include
senior managers with authority over the
units responsible for executing
liquidity-related transactions and other
activities within the liquidity risk
management process. In addition, the
committee should ensure that the risk
measurement system adequately
identifies and quantifies risk exposure.
The committee also should ensure that
the reporting process communicates
accurate, timely, and relevant
information about the level and sources
of risk exposure.
Strategies, Policies, Procedures, and
Risk Tolerances
11. Institutions should have
documented strategies for managing
liquidity risk and clear policies and
procedures for limiting and controlling
risk exposures that appropriately reflect
the institution’s risk tolerances.
Strategies should identify primary
sources of funding for meeting daily
operating cash outflows, as well as
seasonal and cyclical cash flow
fluctuations. Strategies should also
address alternative responses to various
adverse business scenarios.5 Policies
and procedures should provide for the
formulation of plans and courses of
actions for dealing with potential
temporary, intermediate-term, and longterm liquidity disruptions. Policies,
procedures, and limits also should
address liquidity separately for
individual currencies, legal entities, and
business lines, when appropriate and
5 In formulating liquidity management strategies,
members of complex banking groups should take
into consideration their legal structures (branches
versus separate legal entities and operating
subsidiaries), key business lines, markets, products,
and jurisdictions in which they operate.

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material, as well as allow for legal,
regulatory, and operational limits for the
transferability of liquidity. Senior
management should coordinate the
institution’s liquidity risk management
with disaster, contingency, and strategic
planning efforts, as well as with
business line and risk management
objectives, strategies, and tactics.
12. Policies should clearly articulate a
liquidity risk tolerance that is
appropriate for the business strategy of
the institution considering its
complexity, business mix, liquidity risk
profile, and its role in the financial
system. Policies should also contain
provisions for documenting and
periodically reviewing assumptions
used in liquidity projections. Policy
guidelines should employ both
quantitative targets and qualitative
guidelines. These measurements, limits,
and guidelines may be specified in
terms of the following measures and
conditions, as applicable:
• Cash flow projections that include
discrete and cumulative cash flow
mismatches or gaps over specified
future time horizons under both
expected and adverse business
conditions.
• Target amounts of unpledged liquid
asset reserves.
• Measures used to identify volatile
liability dependence and liquid asset
coverage ratios. For example, these may
include ratios of wholesale funding to
total liabilities, potentially volatile retail
(e.g., high-cost or out-of-market)
deposits to total deposits, and other
liability dependency measures, such as
short-term borrowings as a percent of
total funding.
• Asset concentrations that could
increase liquidity risk through a limited
ability to convert to cash (e.g., complex
financial instruments,6 bank-owned
(corporate-owned) life insurance, and
less marketable loan portfolios).
• Funding concentrations that
address diversification of funding
sources and types, such as large liability
and borrowed funds dependency,
secured versus unsecured funding
sources, exposures to single providers of
funds, exposures to funds providers by
market segments, and different types of
brokered deposits or wholesale funding.
• Funding concentrations that
address the term, re-pricing, and market
characteristics of funding sources. This
may include diversification targets for
short-, medium- and long-term funding,
instrument type and securitization
vehicles, and guidance on
6 Financial instruments that are illiquid, difficult
to value, marked by the presence of cash flows that
are irregular, uncertain, or difficult to model.

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concentrations for currencies and
geographical markets.
• Contingent liability exposures such
as unfunded loan commitments, lines of
credit supporting asset sales or
securitizations, and collateral
requirements for derivatives
transactions and various types of
secured lending.
• Exposures of material activities,
such as securitization, derivatives,
trading, transaction processing, and
international activities, to broad
systemic and adverse financial market
events. This is most applicable to
institutions with complex and
sophisticated liquidity risk profiles.
13. Policies also should specify the
nature and frequency of management
reporting. In normal business
environments, senior managers should
receive liquidity risk reports at least
monthly, while the board of directors
should receive liquidity risk reports at
least quarterly. Depending upon the
complexity of the institution’s business
mix and liquidity risk profile,
management reporting may need to be
more frequent. Regardless of an
institution’s complexity, it should have
the ability to increase the frequency of
reporting on short notice if the need
arises. Liquidity risk reports should
impart to senior management and the
board a clear understanding of the
institution’s liquidity risk exposure,
compliance with risk limits, consistency
between management’s strategies and
tactics, and consistency between these
strategies and the board’s expressed risk
tolerance.
14. Institutions should consider
liquidity costs, benefits, and risks in
strategic planning and budgeting
processes. Significant business activities
should be evaluated for both liquidity
risk exposure and profitability. More
complex and sophisticated institutions
should incorporate liquidity costs,
benefits, and risks in the internal
product pricing, performance
measurement, and new product
approval process for all material
business lines, products and activities.
Incorporating the cost of liquidity into
these functions should align the risktaking incentives of individual business
lines with the liquidity risk exposure
their activities create for the institution
as a whole. The quantification and
attribution of liquidity risks should be
explicit and transparent at the line
management level and should include
consideration of how liquidity would be
affected under stressed conditions.

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Liquidity Risk Measurement, Monitoring
and Reporting
15. The process of measuring liquidity
risk should include robust methods for
comprehensively projecting cash flows
arising from assets, liabilities, and offbalance-sheet items over an appropriate
set of time horizons. Pro forma cash
flow statements are a critical tool for
adequately managing liquidity risk.
Cash flow projections can range from
simple spreadsheets to very detailed
reports depending upon the complexity
and sophistication of the institution and
its liquidity risk profile under
alternative scenarios. Given the critical
importance that assumptions play in
constructing measures of liquidity risk
and projections of cash flows,
institutions should ensure that the
assumptions used are reasonable,
appropriate, and adequately
documented. Institutions should
periodically review and formally
approve these assumptions. Institutions
should focus particular attention on the
assumptions used in assessing the
liquidity risk of complex assets,
liabilities, and off-balance-sheet
positions. Assumptions applied to
positions with uncertain cash flows,
including the stability of retail and
brokered deposits and secondary market
issuances and borrowings, are especially
important when they are used to
evaluate the availability of alternative
sources of funds under adverse
contingent liquidity scenarios. Such
scenarios include, but are not limited to
deterioration in the institution’s asset
quality or capital adequacy.
16. Institutions should ensure that
assets are properly valued according to
relevant financial reporting and
supervisory standards. An institution
should fully factor into its risk
management the consideration that
valuations may deteriorate under market
stress and take this into account in
assessing the feasibility and impact of
asset sales on its liquidity position
during stress events.
17. Institutions should ensure that
their vulnerabilities to changing
liquidity needs and liquidity capacities
are appropriately assessed within
meaningful time horizons, including
intraday, day-to-day, short-term weekly
and monthly horizons, medium-term
horizons of up to one year, and longerterm liquidity needs over one year.
These assessments should include
vulnerabilities to events, activities, and
strategies that can significantly strain
the capability to generate internal cash.

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Stress Testing
18. Institutions should conduct stress
tests on a regular basis for a variety of
institution-specific and market-wide
events across multiple time horizons.
The magnitude and frequency of stress
testing should be commensurate with
the complexity of the financial
institution and the level of its risk
exposures. Stress test outcomes should
be used to identify and quantify sources
of potential liquidity strain and to
analyze possible impacts on the
institution’s cash flows, liquidity
position, profitability, and solvency.
Stress tests should also be used to
ensure that current exposures are
consistent with the financial
institution’s established liquidity risk
tolerance. Management’s active
involvement and support is critical to
the effectiveness of the stress testing
process. Management should discuss
the results of stress tests and take
remedial or mitigating actions to limit
the institution’s exposures, build up a
liquidity cushion, and adjust its
liquidity profile to fit its risk tolerance.
The results of stress tests should also
play a key role in shaping the
institution’s contingency planning. As
such, stress testing and contingency
planning are closely intertwined.
Collateral Position Management
19. An institution should have the
ability to calculate all of its collateral
positions in a timely manner, including
assets currently pledged relative to the
amount of security required and
unencumbered assets available to be
pledged. An institution’s level of
available collateral should be monitored
by legal entity, by jurisdiction and by
currency exposure, and systems should
be capable of monitoring shifts between
intraday and overnight or term collateral
usage. An institution should be aware of
the operational and timing requirements
associated with accessing the collateral
given its physical location (i.e., the
custodian institution or securities
settlement system with which the
collateral is held). Institutions should
also fully understand the potential
demand on required and available
collateral arising from various types of
contractual contingencies during
periods of both market-wide and
institution-specific stress.
Management Reporting
20. Liquidity risk reports should
provide aggregate information with
sufficient supporting detail to enable
management to assess the sensitivity of
the institution to changes in market
conditions, its own financial

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performance, and other important risk
factors. The types of reports or
information and their timing will vary
according to the complexity of the
institution’s operations and risk profile.
Reportable items may include but are
not limited to cash flow gaps, cash flow
projections, asset and funding
concentrations, critical assumptions
used in cash flow projections, key early
warning or risk indicators, funding
availability, status of contingent funding
sources, or collateral usage. Institutions
should also report on the use of and
availability of government support, such
as lending and guarantee programs, and
implications on liquidity positions,
particularly since these programs are
generally temporary or reserved as a
source for contingent funding.

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Liquidity Across Legal Entities, and
Business Lines
21. An institution should actively
monitor and control liquidity risk
exposures and funding needs within
and across legal entities and business
lines, taking into account legal,
regulatory, and operational limitations
to the transferability of liquidity.
Separately regulated entities will need
to maintain liquidity commensurate
with their own risk profiles on a standalone basis.
22. Regardless of its organizational
structure, it is important that an
institution actively monitor and control
liquidity risks at the level of individual
legal entities, and the group as a whole,
incorporating processes that aggregate
data across multiple systems in order to
develop a group-wide view of liquidity
risk exposures and identify constraints
on the transfer of liquidity within the
group.
23. Assumptions regarding the
transferability of funds and collateral
should be described in liquidity risk
management plans.
Intraday Liquidity Position Management
24. Intraday liquidity monitoring is an
important component of the liquidity
risk management process for institutions
engaged in significant payment,
settlement and clearing activities. An
institution’s failure to manage intraday
liquidity effectively, under normal and
stressed conditions, could leave it
unable to meet payment and settlement
obligations in a timely manner,
adversely affecting its own liquidity
position and that of its counterparties.
Among large, complex organizations,
the interdependencies that exist among
payment systems and the inability to
meet certain critical payments has the
potential to lead to systemic disruptions
that can prevent the smooth functioning

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of all payment systems and money
markets. Therefore, institutions with
material payment, settlement and
clearing activities should actively
manage their intraday liquidity
positions and risks to meet payment and
settlement obligations on a timely basis
under both normal and stressed
conditions. Senior management should
develop and adopt an intraday liquidity
strategy that allows the institution to:
• Monitor and measure expected
daily gross liquidity inflows and
outflows.
• Manage and mobilize collateral
when necessary to obtain intraday
credit.
• Identify and prioritize time-specific
and other critical obligations in order to
meet them when expected.
• Settle other less critical obligations
as soon as possible.
• Control credit to customers when
necessary.
• Ensure that liquidity planners
understand the amounts of collateral
and liquidity needed to perform
payment system obligations when
assessing the organization’s overall
liquidity needs.
Diversified Funding
25. An institution should establish a
funding strategy that provides effective
diversification in the sources and tenor
of funding. It should maintain an
ongoing presence in its chosen funding
markets and strong relationships with
funds providers to promote effective
diversification of funding sources. An
institution should regularly gauge its
capacity to raise funds quickly from
each source. It should identify the main
factors that affect its ability to raise
funds and monitor those factors closely
to ensure that estimates of fund raising
capacity remain valid.
26. An institution should diversify
available funding sources in the
short-, medium- and long-term.
Diversification targets should be part of
the medium- to long-term funding plans
and should be aligned with the
budgeting and business planning
process. Funding plans should take into
account correlations between sources of
funds and market conditions. Funding
should also be diversified across a full
range of retail as well as secured and
unsecured wholesale sources of funds,
consistent with the institution’s
sophistication and complexity.
Management should also consider the
funding implications of any government
programs or guarantees it utilizes. As
with wholesale funding, the potential
unavailability of government programs
over the intermediate- and long-term
should be fully considered in the

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development of liquidity risk
management strategies, tactics, and risk
tolerances. Funding diversification
should be implemented using limits
addressing counterparties, secured
versus unsecured market funding,
instrument type, securitization vehicle,
and geographic market. In general,
funding concentrations should be
avoided. Undue over-reliance on any
one source of funding is considered an
unsafe and unsound practice.
27. An essential component of
ensuring funding diversity is
maintaining market access. Market
access is critical for effective liquidity
risk management, as it affects both the
ability to raise new funds and to
liquidate assets. Senior management
should ensure that market access is
being actively managed, monitored, and
tested by the appropriate staff. Such
efforts should be consistent with the
institution’s liquidity risk profile and
sources of funding. For example, access
to the capital markets is an important
consideration for most large complex
institutions, whereas the availability of
correspondent lines of credit and other
sources of whole funds are critical for
smaller, less complex institutions.
28. An institution needs to identify
alternative sources of funding that
strengthen its capacity to withstand a
variety of severe institution-specific and
market-wide liquidity shocks.
Depending upon the nature, severity,
and duration of the liquidity shock,
potential sources of funding include,
but are not limited to, the following:
• Deposit growth.
• Lengthening maturities of
liabilities.
• Issuance of debt instruments.7
• Sale of subsidiaries or lines of
business.
• Asset securitization.
• Sale (either outright or through
repurchase agreements) or pledging of
liquid assets.
• Drawing-down committed facilities.
• Borrowing.
Cushion of Liquid Assets
29. Liquid assets are an important
source of both primary (operating
liquidity) and secondary (contingent
liquidity) funding at many institutions.
Indeed, a critical component of an
institution’s ability to effectively
7 Federally-insured credit unions can borrow
funds (which includes issuing debt) as given in
Section 106 of the Federal Credit Union Act
(FCUA). Section 106 of the FCUA as well as § 741.2
of the NCUA Rules and Regulations establish
specific limitations on the amount which can be
borrowed. Federal Credit Unions can borrow from
natural persons in accordance with the
requirements of Part 701.38 of the NCUA Rules and
Regulations.

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respond to potential liquidity stress is
the availability of a cushion of highly
liquid assets without legal, regulatory,
or operational impediments (i.e.,
unencumbered) that can be sold or
pledged to obtain funds in a range of
stress scenarios. These assets should be
held as insurance against a range of
liquidity stress scenarios; including
those that involve the loss or
impairment of typically available
unsecured and/or secured funding
sources. The size of the cushion of such
high-quality liquid assets should be
supported by estimates of liquidity
needs performed under an institution’s
stress testing as well as aligned with the
risk tolerance and risk profile of the
institution. Management estimates of
liquidity needs during periods of stress
should incorporate both contractual and
non-contractual cash flows, including
the possibility of funds being
withdrawn. Such estimates should also
assume the inability to obtain unsecured
funding as well as the loss or
impairment of access to funds secured
by assets other than the safest, most
liquid assets.
30. Management should ensure that
unencumbered, highly liquid assets are
readily available and are not pledged to
payment systems or clearing houses.
The quality of unencumbered liquid
assets is important as it will ensure
accessibility during the time of most
need. For example, an institution could
utilize its holdings of high-quality U.S.
Treasury securities, or similar
instruments, and enter into repurchase
agreements in response to the most
severe stress scenarios.
Contingency Funding Plan 8
31. All financial institutions,
regardless of size and complexity,
should have a formal CFP that clearly
sets out the strategies for addressing
liquidity shortfalls in emergency
situations. A CFP should delineate
policies to manage a range of stress
environments, establish clear lines of
responsibility, and articulate clear
implementation and escalation
procedures. It should be regularly tested
and updated to ensure that it is
operationally sound.
32. Contingent liquidity events are
unexpected situations or business
conditions that may increase liquidity
risk. The events may be institutionspecific or arise from external factors
and may include:
8 Financial

institutions that have had their
liquidity supported by temporary government
programs administered by the Department of the
Treasury, Federal Reserve and/or FDIC should not
base their liquidity strategies on the belief that such
programs will remain in place indefinitely.

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• The institution’s inability to fund
asset growth.
• The institution’s inability to renew
or replace maturing funding liabilities.
• Customers unexpectedly exercising
options to withdraw deposits or exercise
off-balance-sheet commitments.
• Changes in market value and price
volatility of various asset types.
• Changes in economic conditions,
market perception, or dislocations in the
financial markets.
• Disturbances in payment and
settlement systems due to operational or
local disasters.
33. Insured institutions should be
prepared for the specific contingencies
that will be applicable to them if they
become less than Well Capitalized
pursuant to Prompt Correction Action.9
Contingencies may include restricted
rates paid for deposits, the need to seek
approval from the FDIC/NCUA to accept
brokered deposits, or the inability to
accept any brokered deposits.10
34. A CFP provides a documented
framework for managing unexpected
liquidity situations. The objective of the
CFP is to ensure that the institution’s
sources of liquidity are sufficient to
fund normal operating requirements
under contingent events. A CFP also
identifies alternative contingent
liquidity resources 11 that can be
employed under adverse liquidity
circumstances. An institution’s CFP
should be commensurate with its
complexity, risk profile, and scope of
operations.
35. Contingent liquidity events can
range from high-probability/low-impact
events to low-probability/high-impact
events. Institutions should incorporate
planning for high-probability/lowimpact liquidity risks into the day-today management of sources and uses of
funds. Institutions can generally
accomplish this by assessing possible
9 See 12 U.S.C. 1831o; 12 CFR Part 6 (OCC), 12
CFR Part 208, 12 CFR Part 308 (FDIC), and 12 CFR
Part 565 (OTS) and 12 U.S.C. 1790d; 12 CFR Part
702 (NCUA).
10 Section 38 of the FDI Act (12 U.S.C. 1831o)
requires insured depository institutions that are not
well capitalized to receive approval prior to
engaging in certain activities. Section 38 restricts or
prohibits certain activities and requires an insured
depository institution to submit a capital restoration
plan when it becomes undercapitalized. Section
216 of the Federal Credit Union Act and § 702 of
the NCUA Rules and Regulations establish the
requirements and restrictions for Federally-insured
credit unions under Prompt Corrective Action. For
brokered, nonmember deposits, additional
restrictions apply to Federal credit unions as given
in §§ 701.32 and 742 of the NCUA Rules and
Regulations.
11 There may be time constraints, sometimes
lasting weeks, encountered in initially establishing
lines with FRB and/or FHLB. As a result, financial
institutions should plan to have these lines set up
well in advance.

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variations around expected cash flow
projections and providing for adequate
liquidity reserves and other means of
raising funds in the normal course of
business. In contrast, all financial
institution CFPs will typically focus on
events that, while relatively infrequent,
could significantly impact the
institution’s operations. A CFP should:
• Identify Stress Events. Stress events
are those that may have a significant
impact on the institution’s liquidity
given its specific balance-sheet
structure, business lines, organizational
structure, and other characteristics.
Possible stress events may include
deterioration in asset quality, changes in
agency credit ratings, Prompt Corrective
Action (PCA) and CAMELS 12 ratings
downgrades, widening of credit default
spreads, operating losses, declining
financial institution equity prices,
negative press coverage, or other events
that may call into question an
institution’s ability to meet its
obligations.
• Assess Levels of Severity and
Timing. The CFP should delineate the
various levels of stress severity that can
occur during a contingent liquidity
event and identify the different stages
for each type of event. The events,
stages, and severity levels identified
should include temporary disruptions,
as well as those that might be more
intermediate term or longer-term.
Institutions can use the different stages
or levels of severity identified to design
early-warning indicators, assess
potential funding needs at various
points in a developing crisis, and
specify comprehensive action plans.
• Assess Funding Sources and Needs.
A critical element of the CFP is the
quantitative projection and evaluation
of expected funding needs and funding
capacity during the stress event. This
entails an analysis of the potential
erosion in funding at alternative stages
or severity levels of the stress event and
the potential cash flow mismatches that
may occur during the various stress
levels. Management should base such
analysis on realistic assessments of the
behavior of funds providers during the
event and incorporate alternative
contingency funding sources. The
analysis also should include all material
on- and off-balance-sheet cash flows and
their related effects. The result should
be a realistic analysis of cash inflows,
outflows, and funds availability at
12 Federally-insured credit unions are evaluated
using the ‘‘CAMEL’’ rating system, which is
substantially similar to the ‘‘CAMELS’’ system
without the ‘‘S’’ component for rating Sensitivity to
market risk. Information on NCUA’s rating system
can be found in Letter to Credit Unions 07–CU–12,
CAMEL Rating System.

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different time intervals during the
potential liquidity stress event in order
to measure the institution’s ability to
fund operations. Common tools to
assess funding mismatches include:
Æ Liquidity gap analysis—A cash flow
report that essentially represents a base
case estimate of where funding
surpluses and shortfalls will occur over
various future timeframes.
Æ Stress tests—A pro forma cash flow
report with the ability to estimate future
funding surpluses and shortfalls under
various liquidity stress scenarios and
the institution’s ability to fund expected
asset growth projections or sustain an
orderly liquidation of assets under
various stress events.
• Identify Potential Funding Sources.
Because liquidity pressures may spread
from one funding source to another
during a significant liquidity event,
institutions should identify alternative
sources of liquidity and ensure ready
access to contingent funding sources. In
some cases, these funding sources may
rarely be used in the normal course of
business. Therefore, institutions should
conduct advance planning and periodic
testing to ensure that contingent funding
sources are readily available when
needed.
• Establish Liquidity Event
Management Processes. The CFP should
provide for a reliable crisis management
team and administrative structure,
including realistic action plans used to
execute the various elements of the plan
for given levels of stress. Frequent
communication and reporting among
team members, the board of directors,
and other affected managers optimize
the effectiveness of a contingency plan
during an adverse liquidity event by
ensuring that business decisions are
coordinated to minimize further
disruptions to liquidity. Such events
may also require the daily computation
of regular liquidity risk reports and
supplemental information. The CFP
should provide for more frequent and
more detailed reporting as the stress
situation intensifies.
• Establish a Monitoring Framework
for Contingent Events. Institution
management should monitor for
potential liquidity stress events by using
early-warning indicators and event
triggers. The institution should tailor
these indicators to its specific liquidity
risk profile. The early recognition of
potential events allows the institution to
position itself into progressive states of
readiness as the event evolves, while
providing a framework to report or
communicate within the institution and
to outside parties. Early warning signals
may include but are not limited to
negative publicity concerning an asset

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class owned by the institution,
increased potential for deterioration in
the institution’s financial condition,
widening debt or credit default swap
spreads, and increased concerns over
the funding of off-balance-sheet items.
36. To mitigate the potential for
reputation contagion, effective
communication with counterparties,
credit-rating agencies, and other
stakeholders when liquidity problems
arise is of vital importance. Smaller
institutions that rarely interact with the
media should have plans in place for
how they will manage press inquiries
that may arise during a liquidity event.
In addition, group-wide contingency
funding plans, liquidity cushions, and
multiple sources of funding are
mechanisms that may mitigate
reputation concerns.
37. In addition to early warning
indicators, institutions that issue public
debt, utilize warehouse financing,
securitize assets, or engage in material
over-the-counter derivative transactions
typically have exposure to event triggers
embedded in the legal documentation
governing these transactions.
Institutions that rely upon brokered
deposits should also incorporate PCArelated downgrade triggers into their
CFPs since a change in PCA status could
have a material bearing on the
availability of this funding source.
Contingent event triggers should be an
integral part of the liquidity risk
monitoring system. Institutions that
originate loans for asset securitization
programs pose heightened liquidity
concerns due to the unexpected funding
needs associated with an early
amortization event or disruption of
funding pipelines. Institutions that
securitize assets should have liquidity
contingency plans that address this
potential unexpected funding
requirement.
38. Institutions that rely upon secured
funding sources also are subject to
potentially higher margin or collateral
requirements that may be triggered upon
the deterioration of a specific portfolio
of exposures or the overall financial
condition of the institution. The ability
of a financially stressed institution to
meet calls for additional collateral
should be considered in the CFP.
Potential collateral values also should
be subject to stress tests since
devaluations or market uncertainty
could reduce the amount of contingent
funding that can be obtained from
pledging a given asset. Additionally,
triggering events should be understood
and monitored by liquidity managers.
39. Institutions should test various
elements of the CFP to assess their
reliability under times of stress.

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Institutions that rarely use the type of
funds they identify as standby sources
of liquidity in a stress situation, such as
the sale or securitization of loans,
securities repurchase agreements,
Federal Reserve discount window
borrowing, or other sources of funds,
should periodically test the operational
elements of these sources to ensure that
they work as anticipated. However,
institutions should be aware that during
real stress events, prior market access
testing does not guarantee that these
funding sources will remain available
within the same timeframes and/or on
the same terms.
40. Larger, more complex institutions
can benefit by employing operational
simulations to test communications,
coordination, and decision-making
involving managers with different
responsibilities, in different geographic
locations, or at different operating
subsidiaries. Simulations or tests run
late in the day can highlight specific
problems such as difficulty in selling
assets or borrowing new funds at a time
when business in the capital markets
may be less active.
Internal Controls
41. An institution’s internal controls
consist of procedures, approval
processes, reconciliations, reviews, and
other mechanisms designed to provide
assurance that the institution manages
liquidity risk consistent with boardapproved policy. Appropriate internal
controls should address relevant
elements of the risk management
process, including adherence to policies
and procedures, the adequacy of risk
identification, risk measurement,
reporting, and compliance with
applicable rules and regulations.
42. Management should ensure that
an independent party regularly reviews
and evaluates the various components
of the institution’s liquidity risk
management process. These reviews
should assess the extent to which the
institution’s liquidity risk management
complies with both supervisory
guidance and industry sound practices
taking into account the level of
sophistication and complexity of the
institution’s liquidity risk profile.13
Smaller, less-complex institutions may
achieve independence by assigning this
responsibility to the audit function or
other qualified individuals independent
of the risk management process. The
13 This includes the standards established in this
interagency guidance as well as the supporting
material each agency provides in its examination
manuals and handbooks directed at their
supervised institutions. Industry standards include
those advanced by recognized industry associations
and groups.

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Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices

independent review process should
report key issues requiring attention
including instances of noncompliance
to the appropriate level of management
for prompt corrective action consistent
with approved policy.
Holding Company—Liquidity Risk
Management

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43. Financial holding companies,
bank holding companies, and savings
and loan holding companies
(collectively, ‘‘holding companies’’)
should develop and maintain liquidity
management processes and funding
programs that are consistent with their
complexity, risk profile, and scope of
operations. Appropriate liquidity risk
management is especially important for
holding companies since liquidity
difficulties can easily spread to
subsidiary institutions, particularly in
similarly named companies where
customers do not always understand the
legal distinctions between the holding
company and the institution. For this
reason, financial institutions must
ensure that liquidity is adequate at all
levels of the organization to fully
accommodate funding needs in periods
of stress. This includes legal entities on

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a stand-alone basis as well as for the
consolidated institution.
44. Liquidity risk management
processes and funding programs should
take into full account the institution’s
lending, investment and other activities
and should ensure that adequate
liquidity is maintained at the parent
holding company and each of its
subsidiaries. These processes and
programs should fully incorporate real
and potential constraints on the transfer
of funds among subsidiaries and
between subsidiaries and the parent
holding company, including legal and
regulatory restrictions. Holding
company liquidity should be
maintained at levels sufficient to fund
holding company and affiliate
operations for an extended period of
time in a stress environment, where
access to normal funding sources are
disrupted, without having a negative
impact on insured depository institution
subsidiaries.
45. More in-depth discussions of the
specific considerations surrounding the
principles of safe and sound liquidity
risk management of holding companies,
as well as legal and regulatory
restrictions regarding the flow of funds
between holding companies and their

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subsidiaries are contained in the Federal
Reserve’s Trading and Capital Markets
Activities Manual and Bank Holding
Company Supervision Manual and the
Office of Thrift Supervision’s Holding
Companies Handbook.
Dated: June 16, 2009.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, June 29, 2009.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 23rd day of
June, 2009.
By order of the Federal Deposit Insurance
Corporation.
Valerie J. Best,
Assistant Executive Secretary.
Dated: June 10, 2009.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
Dated: February 11, 2009.
By the National Credit Union
Administration Board.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E9–15800 Filed 7–2–09; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;
6720–01–P; 7535–01–P

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