The liquidity profile of the banks could be analysed on a static basis, wherein the assets and liabilities and off-balance sheet items are pegged on a particular day and the behavioural pattern and the sensitivity of these items to changes in market interest rates and environment are duly accounted for.The banks can also estimate the liquidity profile on a dynamic way by giving due importance to:
1) Seasonal pattern of deposits/loans;
2) Potential liquidity needs for meeting new loan demands, unavailed credit limits,
potential deposit losses, investment obligations, statutory obligations, etc.Contingency Funding Plan
- All banks are required to produce a Contingency Funding Plan. These plans are to be prepared by the ALCO, submitted annually as part of the Liquidity and Capital Plan, and reviewed quarterly.
- Contingency Funding Plans are liquidity stress tests designed to quantify the likely impact of an event on the balance sheet and the net potential cumulative gap over a 3-month period.
- The plan also evaluates the ability of the bank to withstand a prolonged adverse liquidity environment. At least two scenarios require testing: Scenario A, a local liquidity crisis, and Scenario B, where there is a nationwide name problem or a downgrade in the credit rating if the bank is publicly rated.
- The bank’s contingency funding plans should reflect the funding needs of any bank
- managed mutual fund whose own Contingency Funding Plan indicates a need for funding
- from the bank.
- ? Reports of Contingency Funding plans should be performed at least quarterly and reported
- to ALCO.
- ? If a Contingency Funding plan results in a funding gap within a 3-month time frame, the
- ALCO must establish an action plan to address this situation. The Risk Policy Committee
- should approve the action plan.
- ? At a minimum, Contingency Funding plans under each scenario must consider the impact
- of accelerated runoff of Large Funds Providers.
- ? The plans must consider the impact of a progressive, tiered deterioration, as well as
- sudden, drastic events.
- ? Balance sheet actions and incremental sources of funding should be dimensioned with
- sources, time frame and incremental marginal cost and included in the Contingency
- Funding plans for each scenario.
- ? Assumptions underlying the Contingency Funding plans, consistent with each scenario,
- must be reviewed and approved by ALCO.
- ? The Chief Executive / Chairman must be advised as soon as a decision has been made to
- activate or implement a Contingency Funding Plan. Implementation of a Contingency
- Funding Plan may be called for by either the Chief Executive or the Risk Policy
- Committee.
- ? The ALCO will implement the Contingency Funding Plan, amending it in agreement with
- the Risk Policy Committee, where necessary, to meeting changing conditions; daily
- reports are to be submitted to the Treasury Head and the Risk Policy Committee,
- comparing actual cashflows with the assumptions of the Contingency Funding Plan.
