Examination Guidance - Asset-Based Liquidity Ratio and your Funds Management Policy
 

We are hearing from sources that banks need to make sure they have certain documentation in place on Liquidity.   

Specifically, banks must calculate an asset-based liquidity ratio and must have in their Funds Management Policy how this ratio is defined and calculated.  It is also a requirement to have a Policy Limit on this Liquidity Ratio, which also must be in the policy.  This calculation needs to be performed every reporting period, compared to the Policy Limit for compliance and the bank must document that this process has taken place along with the results.

Individual banks may decide exactly how to calculate their specific liquidity ratio but a good example of an asset-based liquidity ratio is shown below.  Also, banks are able to set their own Policy Limit for this type of ratio.  A suggested level for this Policy Limit is around 5% but this is not set in stone and banks can set the level of this policy limit as they see fit.

 Liquid Assets / Total Assets

( Total Cash Due + FFS + Fed Balances + Securities Due < 1 Year ) / ( Total Assets )

Failure by banks to have this documentation in place may cause the bank to be subject to receiving an MRBA (Matter Requiring Board Attention) with no tolerance from examiners.  This is a separate page in the ROE (Report of Exam).  There are various levels of recommendations during an exam.  If something reaches MRBA status though, these are viewed as very significant recommendations.  Failure to follow the recommendation could lead to a bank receiving an Enforcement Order, which becomes public information and could lead to Prompt Corrective Actions (PCAs). 

Another ratio that has received increased attention is Reliance on Wholesale Funding.  An acceptable range for this Policy Limit is that wholesale funding as a percent of total liabilities should not be more than 20% to 30%.  The Reliance on Wholesale Funding is calculated as follows:

(FHLB Advances + Brokered CD + Internet Deposits + Time Deposits >250k and <=1yr + Fed Funds Purchased) / Total Liabilities

Asset Management Group, Inc. (AMG) calculates many other different liquidity ratios in its reporting service.  One other ratio and calculation that has received increased scrutiny is the Liquidity Coverage Ratio.  This ratio is calculated by running all the cashflows for the bank out 365 days, both cash inflows and cash outflows, and then dividing the inflows by the outflows.  This ratio should be positive.  The inputs and cashflows in the analysis should also be stressed.  AMG provides the stress run in their reporting as well along with providing the actual worksheet to clients so that they may run further stresses in house. 

For further information on these liquidity issues or any of the services provided by AMG, please feel free to reach out to your Capital Markets Group Investment Sales Representative.  You may also contact AMG directly at 800-226-1923 or at AMG@CountryClubBank.com.