Financial institutions commonly consider investment securities and wholesale sources to be their funding sources. However, some examiners are beginning to challenge this.
Investment securities can be classified as held-to-maturity (HTM) or available-for-sale (AFS), and institutions commonly include all investment securities in their balance sheet liquidity ratios. However, some examiners are now recommending that HTM securities not be included since management’s intent is to hold, and not sell, these securities. Likewise, management may not be able to sell securities with unrealized losses due to capital restraints, so some examiners are now recommending that any securities with significant losses not be included in balance sheet liquidity. If securities cannot be considered balance sheet liquidity, then management should evaluate including them in contingent liquidity as they can be pledged for borrowing purposes.
Wholesale funding sources, such as deposit brokers, listing services, and borrowings from other banks, are commonly listed in contingency funding plans as potential sources and included in contingent liquidity ratios. For institutions that list these sources, it’s important to ensure that such providers are authorized in policy and approved by the Board, agreements have been established, and access to platforms has been set up. In other words, management should be able to utilize these sources immediately at a moment’s notice if they are going to be considered contingent funding sources. If an institution is not set up with a source, then management should not consider that source to be readily available in a crisis event. Additionally, all wholesale funding sources should be periodically tested to ensure operational effectiveness of the source and management’s understanding of how to access the source.
Effective asset/liability management practices are always important and they are especially critical right now. Through our banking services practice, Weaver can help financial institutions assess risks, evaluate and meet independent review requirements associated with liquidity and funding practices, and develop processes and controls necessary for a strong risk management environment. Contact us for information.