Bank Liquidity and Wholesale Funding Part II. 2 This course will address bank liquidity and...
-
Upload
barnaby-york -
Category
Documents
-
view
215 -
download
0
Transcript of Bank Liquidity and Wholesale Funding Part II. 2 This course will address bank liquidity and...
Bank Liquidity andBank Liquidity andWholesale Funding Part IIWholesale Funding Part II
Bank Liquidity andBank Liquidity andWholesale Funding Part IIWholesale Funding Part II
2
Bank Liquidity and Wholesale Funding Part II
This course will address bank liquidity and wholesale funding history and trends.
Click the links below to launch each section of the course.
Bank Liquidity andBank Liquidity andWholesale Funding IIWholesale Funding IIBank Liquidity andBank Liquidity and
Wholesale Funding IIWholesale Funding II
Liquidity Risk Liquidity Risk Warning IndicatorsWarning Indicators
4
Background: Examination Trends
June 30, 2004 – FDIC-supervised banks with 3- or 4-rated liquidity studied closely
2004 exam data indicated less than 1% of FDIC-supervised banks had marginal or poor liquidity
5
Common Factors
Factors shared by institutions with 3- or 4-rated liquidity:– Asset size characteristic of 'community' bank– Rapid asset growth funded by higher cost
funding– Stagnant core deposit levels
6
Determining Trends
Review examination reports and UBPR ratios for banks with poor liquidity
Determine early warning indicators Lone indicators do not imply bank headed
toward liquidity problem Multiple indicators – monitor banks closely
7
Liquidity Risk Warning Indicators
Early Warning Indicators Trust Preferred Securities Asset Securitization Deposits
8
Early Warning Indicators
Weak funds management policy, liquidity monitoring, and control of processes
Competition from the marketplace straining efforts to attract core deposits
Developing a pattern of offering higher rate deposits to attract funds
Reduction in secondary sources of liquidity
9
Early Warning Indicators (Continued)
Previously unsecured lines of credit require collateral
Securities portfolio almost totally pledged as collateral
FHLB borrowing requirements change from blanket lien to specific lien
Unproven stability of large depositors
10
Early Warning Indicators (Continued)
Increasing trend in adverse classifications and past-due loans
Weaknesses in loan underwriting and credit administration
Replacement of loan officers
11
Early Warning Indicators (Continued)
Ratios for loans-to-assets, loans-to-deposits, and loans-to-core deposits trending upward, or in excess of 100%
Net non-core funding dependency ratio high relative to peer ratios
Escalating level of unfunded loan commitments, letters of credit, other contingent liabilities
12
Strategies Contributing to Downgrade
Low level of core funding Board of Directors abdicating liquidity risk
oversight to bank management Aggressive loan growth Outdated funds management policy
13
What We've Learned
Based on patterns and trends, we've learned:
Evaluating bank funding strategies and liquidity – challenging for examiners
Many innovative funding strategies add to this challenge
Characteristics and behavior of traditional core deposit products have evolved and changed
14
Examiners Must Evaluate
Characteristics/risks of banks' core funding sources
Characteristics/risks of banks' non-core funding sources
Overall management of banks' liquidity position
15
Liquidity Risk Warning Indicators
Early Warning Indicators Trust Preferred Securities Asset Securitization Deposits
16
Trust Preferred Securities
Viewed as capital injection
rather than a funding source…
17
Liquidity Risk Warning Indicators
Early Warning Indicators Trust Preferred Securities Asset Securitization Deposits
18
Asset Securitization as a Funding Source
Can be effective funding source Associated risks Contain early amortization clauses Clause may be triggered – banks must
repay earlier than expected
19
Consider the Issuing Institution
Issuing institution – large concentration of residual assets
Overall cash flow might depend on residual cash flows form underlying assets' performance
If performance declines, cash flow is less than anticipated
Could impact bank's liquidity position
20
Asset Securitization and Reputation
Bank's reputation critical to ability to securitize
If reputation damaged, may be unable to secure assets
Could seriously impact bank's liquidity position
21
Liquidity Risk Warning Indicators
Early Warning Indicators Trust Preferred Securities Asset Securitization Deposits
22
Deposits
Play critical role in bank's operation Increasing market competition – many
banks have difficulty retaining and growing deposit base
Many banks have difficulty differentiating core/non-core deposits
23
Core Deposits
Difficult to simply rely on definition when calculating bank's core deposit base.
24
Volatile Deposits
CDs under $100,000 obtained from Internet CD source– Defined as core deposits– May be volatile in response to interest rate
changes
Local, large CDs – Defined as non-core deposits– May be very stable
25
Core vs. Non-Core Funding
Apply it to bank's overall funding Do not just apply it to deposit base Evaluate characteristics/behavior of all
funding sources to determine core vs. non-core
26
Deposit Brokers
Rise in use of deposit brokers Traditional served as intermediaries
between banks/investors With advent of Internet/CD listing services,
investors identify high-yield deposit sources Banks willing to compete – can attract
deposits
27
Brokered Deposits
May be labeled 'brokered' even if they were not obtained through a deposit intermediary
If the effective yield on a deposit is more than 75 bp over prevailing yields, the deposit may fall within 'brokered' guidelines
28
Factors to Consider
Depositor Loyalty
Management Tracking
Due Diligence
Impact to Earnings/Capital
Contingency Plan
Diversification vs. Cost
UBPR Ratio Analysis
Liquidity Ratios
29
Depositor Loyalty?
Dependent on relationships
Affected by yield
30
Management Tracking
Monitoring:– Number– Magnitude
Plan for changes in volume
31
Due Diligence
Due diligence prior to entering relationship:
Consider reputation
Check references
32
Impact on Earnings and Capital
Does management:
Assess impact to earnings and capital?
Consider impact of rate sensitive deposits?
33
Contingency Plan - Purpose
Manage fluctuations in liquidity
Monitor liquidity risk
Maintain appropriate assets
Measure and project funding requirements
Manage access to funding sources
34
Contingency Plan - Elements
Define responsibilities/decision-making authority
Assess potential for erosion Assess potential liquidity risk posed by
other activities
35
Contingency Plan - Elements
Analyze/project significant on- and off-balance sheet funding cash flows and their related effects
Match potential sources and uses of funds
Identify and assess adequacy of contingent funding sources
36
Contingency Plan - Elements
Assess potential for triggering legal restrictions on bank’s access to brokered deposits
Accelerate timeframes for reporting in a problem liquidity situation
37
Diversification vs. Cost
Maintain access to more funding lines
Allow flexibility
Minimize risk associated with a single funding source
38
UBPR Ratio Analysis
Useful analytical tool
Can be used to identify trends
Used in conjunction with bank’s internal liquidity ratios
39
UBPR Ratio Analysis and Peer Groups
Important to recognize peer group comparisons may not be useful
Banks free to manage funds as they deem appropriate
Examiners – do not assume liquidity problem just because bank is different from peers
40
UBPR Ratio Analysis and Big Picture
May not provide accurate picture of bank's liquidity
Examiners – evaluate characteristics and behavior of asset and liability accounts before analyzing UBPR liquidity ratios
41
Beyond UBPR Ratio Analysis
Consider account categories to determine if UBPR ratios capture them appropriately
Do not simply rely on UBPR definition
42
UBPR Ratio Analysis - Example
UBPR definition – out-of-area CDs less than $100,000 from Internet listing service – core deposit
Reality – these deposits are generally unstable – not a true core deposit funding source
43
Common Liquidity Ratios
Net short-term non-core funding dependence Net non-core funding dependence Net loans and leases to deposits Net loans and leases to total assets Short-term assets to short-term liabilities Pledged securities to total securities Brokered deposits to total deposits Core deposits to total liabilities
44
Ratios for Analysis
In the past, focus was on two ratios
Currently, selection of ratios provided for analysis – all should be considered
Also consider bank's internal ratios
45
Liquidity Risk Warning Indicators
Early Warning Indicators
Trust Preferred Securities
Asset Securitization
Deposits
46
In the next section…
Select the next section, Examination Guidance and Procedures, to continue.