What do a massive uptick in deposits, a possible impending recession, and a tremendous hike in interest rates have in common? Absolute potential for wreaking havoc on your institution’s liquidity position. One unplanned or mismanaged situation could mean falling out of policy limits, or worse.

Before we dig into what the present state of the economy could mean for your organization’s liquidity position, let’s make sure we’re on the same page with what we’re discussing. Per the OCC, “Liquidity is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses. Bank management must ensure that sufficient funds are available at a reasonable cost to meet potential demands from both funds providers and borrowers.” In essence, is your organization adequately prepared to meet significant funding needs should they arise?

Under “normal” circumstances, liquidity may not be top of mind – just another assumed check box that’s probably still okay. However, as we know all too well, there is nothing normal about the past few years. Not only are we seeing organizations falling out of policy limits, we’re seeing potential problem areas that could materially worsen should market liquidity further tighten.

So, what can you do to be sure that you have a healthy liquidity management program? Here are a few considerations to ensure you’re in compliance and can handle what may lie ahead.

1. Adequately train your staff, ALCO, and Board of Directors

Personnel at all levels have a fiduciary responsibility to understand, manage, and monitor funding risks. Read more about the specifics of these responsibilities by clicking here. If you are concerned that your staff and board may not be adequately trained, Plansmith can help.

2. Regularly review your Policy Limits

As times and circumstances change, your policy limits and compliance should be reviewed more frequently. Especially during these times of frequent and drastic rate hikes, financial institutions may find themselves out of compliance more quickly than they’d think. If you’d like help assessing your policy limits, our advisory team can provide a policy limits review. Or, if you could use some in-depth training on policy limits, click here to access our on-demand premium training.

3. Ensure your Budgeting, Forecasting, and Liquidity Measurement Systems are adequate

While under times of limited rate fluctuations and otherwise little economic uncertainty, it may be fairly simple to apply basic ratios or averages in a spreadsheet or simple report format. However, under more stressful environments, more robust platforms could truly mean the difference between a successful or problematic exam. For example, our Compass software includes easy to use tools that take liquidity and cash flow modeling to more in-depth levels. By using our automated cash flow models or outsourcing the process of liquidity stress testing to us, your management team will make better-informed business decisions and more easily stay in compliance.

Again, during normal times, liquidity may be a back-burner topic; but, with interest rates skyrocketing, now is the perfect time to ensure your liquidity management plan is adequate. In addition to powerful software tools, our Advisory/Professional Services team of former FDIC and NCUA examiners is always available to help you. If you have any questions or would like to discuss how Plansmith can help your bank or credit union, please click here to open a dialogue.

Dave Wicklund
Director of ALM Advisory Services