CUNA Regulatory Comment Call

July 10, 2009

Interagency Guidance: Funding and Liquidity Risk Management


Please feel free to fax your responses to CUNA at (202) 638-7052, or e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at and Regulatory Counsel Luke Martone at You may also contact us at (800) 356-9655, ext. 6743, with any questions. Click here for the proposed Guidance in the Federal Register.


The proposed Guidance was issued in response to recent market turmoil and addresses the importance of liquidity risk management to the safety and soundness of financial institutions. The proposed Guidance summarizes the principles of sound liquidity risk management previously issued by the NCUA, Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the agencies) in conjunction with the Conference of State Bank Supervisors.

The agencies have jointly released the Guidance in an effort to provide consistent interagency expectations on sound practices for managing funding and liquidity risk. The Guidance addresses the importance of cash flow projections, diversified funding sources, stress testing, an adequate amount of liquid assets, and a contingency funding plan (CFP) to manage liquidity risk.

The agencies' proposed Guidance focuses on all domestic financial institutions, including banks, thrifts, and credit unions.


The Guidance recommends financial institutions manage liquidity risk using processes and systems that are commensurate with the institutions' complexity, risk profile, and scope of operations. Failure to maintain an "adequate liquidity risk management process" is considered an unsafe and unsound practice.

Proper management of an institution's cash flows is vital to adequately managing its liquidity risk-that is, the risk that the institution's financial condition or overall safety and soundness is adversely affected by its inability to meet liquidity needs. The Guidance recommends that institutions maintain a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk, and that the liquidity risk management be fully integrated into the institution's risk management process. Proper liquidity risk management should include:

Corporate Governance

The board of directors is ultimately responsible for the liquidity risk of an institution. As such, the board—or delegated committee of its members—should oversee and periodically review the liquidity management strategies, policies, and procedures.

Following board approval, the institution's senior management is responsible for making sure the strategies, policies, and procedures are properly executed. Senior management is also tasked with determining the structure, responsibilities, and controls for managing liquidity risk and for overseeing the institution's liquidity positions. The individuals or committees responsible for making liquidity risk decisions should be clearly identified.

Strategies, Policies, Procedures, and Risk Tolerances

The Guidance recommends that institutions have documented strategies and policies for managing liquidity risk as well as limiting risk exposure. Such strategies should not only address funding sources for daily and seasonal needs, but should also address situations in which liquidity funding is disrupted—whether such disruption be short- or long-term. The strategic planning and budgeting processes should include assessment of the liquidity costs, benefits, and risks.

Additionally, institutions should establish an appropriate liquidity risk tolerance; this will allow management to recognize any inconsistencies between its strategies and the pre-determined tolerance. Management's strategies should be documented in periodic liquidity risk reports. The reports should include items such as: "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."

An institution's policies and procedures should contain measurements and limits relating to cash flow projections, target amounts of unpledged liquid asset reserves, asset concentrations, funding concentrations, and contingent liability exposures.

Liquidity Risk Measurement, Monitoring, and Reporting

Proper liquidity risk measurement should include components to project cash flows arising from assets, liabilities, and off balance-sheet items. Any assumptions used in the measurement process should be reasonable and reviewed periodically.

The Guidance also recommends that institutions be able to determine all of their collateral positions in a timely manner, including currently pledged assets, as well as unencumbered assets available to be pledged.

Stress Testing

Periodic stress testing for various institution-specific and market-wide events should be conducted. Test results should determine what, if any, action management will take to alleviate the institution's liquidity risk.

Intraday Liquidity Position Management

Institutions engaged in "significant payment, settlement, and clearing activities" should establish processes for monitoring intraday liquidity. Such processes should include active management of the institution's intraday liquidity positions and risks to meet payment and settlement obligations under both normal and stressed conditions.

Proper intraday liquidity strategy should allow the institution to: monitor and measure expected daily gross liquidity in/outflows; manage and mobilize collateral when needed for intraday credit; identify and prioritize time-specific and other critical obligations; settle less critical obligations as soon as possible; control credit to customers when necessary; and ensure liquidity planners understand the collateral and liquidity needed for payment system obligations.

Diversified Funding

The Guidance encourages institutions to establish a funding strategy that effectively diversifies the sources and maturities of funding. An institution should regularly assess its ability to raise funds quickly from each source, and identify any impediments to these funds.

The diversity requirement applies to funding sources in the short-, medium-, and long-term. Institutions should understand and account for the intermittent nature of any government programs they may be relying on when developing liquidity risk management strategies. Undue over-reliance on any one source of funding is considered an unsafe and unsound practice; therefore funding concentrations should generally be avoided.

Senior management should ensure active management of market access—which is an essential component of proper diversification.

Cushion of Liquid Assets

Institutions should hold an appropriate amount of liquid assets as insurance against certain liquidity stress scenarios. The results of stress tests, as well as an institution's risk tolerance and profile, should dictate the size of the cushion of liquid assets.

Contingency Funding Plan (CFP)

The Guidance recommends that all financial institutions develop and implement a formal CFP to address liquidity shortfalls in emergency situations. Contingent liquidity events are unexpected situations that may increase liquidity risk, and may be institution-specific or due to external factors, such as dislocations in the financial markets. Additionally, certain contingencies will arise for insured institutions that become less than Well Capitalized pursuant to Prompt Correction Action.

A CFP provides a documented framework for managing unexpected liquidity needs. It is meant to ensure that the institution's sources of liquidity are sufficient to fund normal operating requirements during contingent events.

Generally, a CFP should: identify stress events; assess levels of severity and timing; assess funding sources and needs—including liquidity gap analyses and stress tests; identify potential funding sources; establish liquidity event management processes; and establish a monitoring framework for contingent events.

Internal Controls

Appropriate internal controls should address relevant elements of the risk management process, the adequacy of risk identification, risk measurement, reporting, and compliance with rules and regulations.

An institution's liquidity risk management process should be regularly reviewed by an independent party.


  1. Are the proposed responsibilities of the board of directors and senior management appropriate?

  2. Is the proposed Guidance regarding strategies, policies, and procedures of risk management consistent with current practices?

  3. Does the proposed guidance regarding diversified funding appear manageable?

  4. Does conformance with the proposed Contingency Funding Plan appear manageable?

  5. The proposed Guidance in its entirety (absent a section on holding companies) applies to all financial institutions and credit unions of all sizes and complexities. Is uniform application appropriate?

  6. Will compliance with any aspects of the proposed Guidance be problematic?

  7. Any other comments, questions, or concerns?

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 •