PHOENIX-A liquidity policy is different from a contingency funding plan, and should be part of every credit union's overall strategic planning, according to John Myers.
Myers, president of c. myers corporation, reminded that CUs should establish lines of authority and responsibilities, know the available sources of liquidity, establish risk tolerance and limits, define minimum expectations for monitoring and early warning indicators, define minimum expectations for reporting, and periodically review assumptions, limits and early warning indicators.
"Bad practices would include waiting until a week before providing the liquidity risk policy to the board to solicit feedback from management and staff, not demanding quality feedback from others at the credit union, and not really understanding how the policy will impact business decisions and strategic decisions," Myers told the CUNA CFO Council meeting.
Another bad practice would be copying and pasting another CU's liquidity risk policy, he added. "NCUA wants the policy to be commensurate with size of the credit union, the scope of its operations and the risk involved."
Elements Of A Liquidity Risk Policy
Adam Johnson, EVP/principal of c. myers corporation, said a liquidity risk policy must be prepared to handle a variety of scenarios. He said a sound policy will:
* Have a funding mix.
* Have a program in place to track unfunded loan commitments ("If members suddenly draw on lines of credit, it is important to know why," Johnson said).
* Know total borrowing capacity, both including and excluding the Fed Discount Window and/or the CLF.
* Account for unencumbered liquid assets and unencumbered assets.
* Include coverage ratios.
* Calculate uninsured deposits divided by assets (or liabilities).
* Have liquidity timeframes-from intraday to day-to-day, up to weekly, monthly or 12 months.
Six Things To Consider
Myers said a contingency funding play, must address six issues:
1. The sufficiency of a CU's liquidity sources to meet normal requirements and contingent events.
2. Identification of contingent liquidity sources.
3. Policies to manage a range of stress environments, possible stress events and identification of likely liquidity responses.
4. Lines of responsibility within the institution to respond to liquidity events.
5. Management processes that include clear implementation and escalation procedures for liquidity events.
6. Frequency the institution will test and update the plan.
"When considering contingent liquidity sources, it is important to know the time needed to access each one," Myers said. "Will access to liquidity be immediate? Will it come through on the same day?"
Other factors include how long the CU will be allowed to use the funds, Myers added, noting the limit on money received from the Fed discount window is one to 14 days.
Level of Detail
Even how detailed the contingency funding play will be is a consideration for CFOs, Myers said. Each CU must decide if its CFP will include specific details such as the phone number for the Fed Discount Window and/or week-by-week operational timetables, or if it will be a high-level plan that expects management to make decisions at the time of the liquidity event.
