Liquidity Risk and Funds Management · FEDERAL DEPOSIT INSURANCE CORPORATION Brokered & High Rate...

Liquidity Risk and Funds Management

June 15, 2017New York Region Regulatory Teleconference

FEDERAL DEPOSIT INSURANCE CORPORATION

Scope of Discussion

Liquidity Trends

Funding Types and Potential Risks

Measurement Systems

Stress Testing and Contingency Funding Plans

Ripple Effect of Interest Rate Risk

Q&A Open Forum

2


Forward‐Looking Cash Flow Analysis & Stress Testing

Asset‐Based Liquidity Management

Liquidity Evolution: Then & Now

Static Balance Sheet Ratios (Liquidity Ratio)

Securities Assumed Liquid & Loans Considered Illiquid

Wholesale Lines & Pledging Limited

1997 Balanced Funds Management Approach2017

Less Liquid Securities & More Liquid Loans

Wholesale Lines & Pledging Expanded

3


Industry Trends – Asset Based Liquidity

0%

10%

20%

30%

40%

50%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Investment Securities

Cash & Fed Funds Sold

% of Earning AssetsMarketable & Liquid Asset Trends

Source: FDIC Call Reports. Based on NY Region banks under $10B in total assets. 4


Industry Trends – Liability Based Funding

50%

60%

70%

80%

90%

100%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Deposits

% of Earning AssetsDeposit & Other Funding Trends

Source: FDIC Call Reports. Based on NY Region banks under $10B in total assets.

Borrowings , Repos, & Fed Funds Purchased

5


Industry Trends – Liability-Based Funding

Noncore Deposits

Borrowings, Repos, & Fed Funds Purchased

6

Core DepositsTotal Deposits

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Listing Service Deposits

Borrowings

CDs > Insurance Limit

Brokered Deposits

Non‐Core Funding Trends% of Earning Assets

Source: FDIC. Based on insured institutions in the nation under $10B in total assets.


Funding Types and Potential Risks

Brokered Deposits

High Rate Deposits

Listing Service Deposits

Municipal Deposits

Other Potentially Volatile Deposits

Wholesale and Other Funding Sources7


Brokered & High Rate Deposits

Part 337 of the FDIC Rules & Regulations

• “Well Capitalized”: No restriction on brokered deposit use or rates paid on all deposits.

• “Adequately Capitalized”:Waiver required to solicit/renew/rollover brokered deposits. Restriction on rates paid for all deposits.

• Less than “Adequately Capitalized”: Prohibited from brokered deposit use. Restriction on rates paid for all deposits.

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Other Potentially Volatile Deposits

UninsuredDeposits

• Deposits Over $250,000• Assessment of the Relationship• Consider if the Customer Uses Other Bank Products and Services

LargeDepositors

• Deposits Over $250,000• Assessment of the Relationship• Consider if the Customer Uses Other Bank Products and Services

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Funding Concentrations

Report of Examination – Concentrations

• Single Funding Sources

• Combined Potentially Volatile Funding Sources

10


Funds Management

Contingency Funding Plans

Stress Testing

Measurement Systems

Funds Management

11


Measurement Systems

Pro Forma Cash Flow Projections• Varying Time Horizons• Categories of Sources & Uses• CASH – Outflows + Inflows

Other Liquidity Measures

Documented & Supported Assumptions

12


Stress Testing

Stress Testing

Measurement Systems

Funds Management

13


Stress Testing

Institution‐Specific & Market Based

Cash Flow Projections under Adverse Scenarios

Identifies Sources of Liquidity Strain

Sufficient Frequency &Magnitude

Foundation for Contingency Funding Plans

14


Stress Testing – Adverse Scenarios

Asset Quality Concerns

Reputation Risk

Rapid Growth

Regulatory Restrictions

Institution‐Specific Examples

15


Stress Testing – Adverse Scenarios

Capital Market Disruption

Economic Conditions

Uncertainty in Industry

Changes in Interest Rates

Systemic Examples

16


Cushion of Highly Liquid Assets

Unencumbered, Readily Saleable

Assess Peak Historic Cash Flow Needs

Add-on for Adverse Liquidity Events

Cushion Should be Established within Policies

17


Cushion and Stress Test Relationship

18

Cushion

Scenario Analysis

Mitigate

Comfortable?




Stress Testing

Measurement Systems

Funds Management

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Contingency Funding Plans – Expectations

Identify Stress Events

Assess Stress Level and Timing

Assess Funding Sources and Needs

Establish Event Management Process

Develop Action Plans

Establish Monitoring Framework

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Market Risk – “The Ripple Effect”

Non‐Core Earnings Risk

Credit Risk

Liquidity Risk

Interest Rate Risk

21


Liquidity Effects of Interest Rate Risk

• Inverse Relationship Between Interest Rates and Mortgage‐Related Payments

• Funding Flows & Parked FundsCash Flows

Price Risks

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Rate Changes & Mortgage Cash Flows

0

3

6

9

12

15

0%

20%

40%

60%

80%

‐100 Stable +100 +200 +300

Rate Changes Can Have Considerable Impact on Prepayment SpeedsWAL, in YearsPrincipal Repaid

Rate Scenario (bps)

Weighted Average Life (right axis)

Principal Cash Flow Repaid within 3 Years

(left axis)

Hypothetical Impact to 30‐Year Mortgage Pool with 4% Coupon. 23


Rate Changes & Funding Flows

Source: FDIC Call Reports. Based on median figures of all NY Region banks under $10B in total assets.Other borrowings includes Fed Funds purchased.

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0%

10%

20%

30%

40%

50%

60%

70%

1997 1998 2000 2002 2004 2005 2007 2009 2011 2012 2014 2016

% of Earning Assets

Deposit Share of Earning AssetsFederal Funds Rate

Savings/MMDA/Checking (left axis)

Federal Funds Rate (right axis)

Time Deposits & Other Borrowings (left axis)

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Liquidity Effects of Interest Rate Risk

• Inverse Relationship Between Interest Rates and Mortgage‐Related Payments

• Funding Flows & Parked FundsCash Flows

• Inverse Relationship Between Interest Rates and Asset Prices (Valuations)

• Ability to Sell Considerations • Collateral Requirements & Margin Calls

Price Risks

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Rate Changes & Price Risks (Valuations)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

4Q00 4Q02 4Q04 4Q06 4Q08 4Q10 4Q12 4Q14 4Q16

Unrealized G/L onSecurities (left‐axis)

10Y Rate (right axis)

Source: FDIC Call Reports. Based on NY Region banks under $1B in total assets. Excludes former TFR filers.

10Y Treasury RateUnrealized G/L to BV

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Resources

Outstanding Guidance• Interagency Policy Statement on Funding & Liquidity Risk Management (FIL‐13‐10)• Part 337 of the FDIC’s Rules and Regulations• FAQ on Identifying, Accepting, and Reporting Brokered Deposits (FIL‐42‐2016)• Process for Determining If An Institution Subject to Interest Rate Restrictions is

Operating in a High‐Rate Area (FIL‐69‐2009)• Joint Agency Policy Statement on Interest Rate Risk (FIL‐52‐96)• FDIC Risk Management Manual of Examination Policies

Capital Markets Specialists• Michael E. Aldrich (781) 274‐8127 x4754 [email protected]• Michael J. Kostrna (917) 320‐2533 [email protected]• Gregory M. Quint (781) 794‐5521 [email protected]

Director’s College Program: “Liquidity Risk Management”Director’s Resource Center: www.fdic.gov/resourcecenterCapital Markets Resource Center: www.fdic.gov/regulations/capital

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Liquidity Risk & Funds Management

QUESTION & ANSWER


Stress Testing

Measurement Systems

Funds Management

OPEN FORUM

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