MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4408.12.31customer behavior in addition tocontractual maturities. Many cash flows areuncertain and may not necessarily followcontractual maturities. Cash flows may beinfluenced by interest rates and customerbehavior, or may simply follow a seasonalor cyclical pattern. When modelingliquidity risk, it is important thatassumptions be documented. Assumptionsshould be reasonable and should be basedon past experiences or with considerationof the potential impact of changes inbusiness strategies and market conditions.Measurement tools should include asufficient number of time bands to enableeffective monitoring of both short- and longtermexposures. This expectation appliesnot only to complex simulation modeling,but to the construction of simple liquidityGAP models as well.To sufficiently measure an FI’s liquidityrisk, management should analyze how itsliquidity position is affected by changes ininternal (company-specific) and external(market-related) conditions. Managementwill need to assess how a shift from anormal scenario to various levels ofliquidity crisis can affect its ability to sourceexternal funds and at what cost, liquidatecertain assets at expected prices withinexpected timeframes, or hasten the needto settle obligations (e.g., limited ability toroll-over deposits). Management should, ata minimum, consider stress scenarioswhere securities are sold at prices lowerthan anticipated and credit lines arepartially or wholly cancelled.Regardless of the liquidity risk modelsused, an FI should adopt an appropriatecontingency plan for handling liquiditycrisis. Well before a liquidity crisis occurs,management should carefully plan how tohandle administrative matters in a crisis.Management credibility, which is essentialto maintaining the public’s confidence andaccess to funding, can be gained or lostdepending on how well or poorly someadministrative matters are handled. Acontingency funding/liquidity planensures that an FI is ready to respond toliquidity crisis.The sophistication of a contingency planshould be commensurate with the FI’scomplexity and risk exposure, activities,products and organizational structure. Theplan should identify the types of events thatwill trigger the contingency plan, quantifypotential funding needs and sources andprovide the specific administrative policiesand procedures to be followed in a liquiditycrisis.Specifically, the contingency planshould:1. Clearly identify, quantify and rankall sources of funding by preferenceincluding, but not limited to:• Reducing assets• Modifying the liability structure orincreasing liabilities• Using off-balance-sheet sources,such as securitizations• Using other alternatives forcontrolling balance sheet changes2. Consider asset and liabilitystrategies for responding to liquidity crisisincluding, but not limited to:• Whether to liquidate surplusmoney market assets• When (if at all) HTM securitiesmight be liquidated• Whether to sell liquid securities inthe repo markets• When to sell longer-term assets,fixed assets, or certain lines of business• Coordinating lead bank fundingwith that of the FI’s other banks and nonbankaffiliates• Developing strategies on how tointeract with non-traditional fundingsources (e.g., whom to contact, what typeof information and how much detail shouldbe provided, who will be available forfurther questions, and how to ensure thatcommunications are consistent)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 7