Office of Thrift Supervision Page 1

Office of Thrift Supervision June 8, 2001

Department of the Treasury

Regulatory Bulletin

RB 34

Handbook: Thrift Activities

Subject: Cash Flow and Liquidity Management Section: 530

Examiner Guidance on Wholesale Borrowings

Summary: This bulletin provides guidance to examiners for the review of complex wholesale 

borrowings by savings association.

For further information contact: Your Office of Thrift Supervision (OTS) Regional Office or the Risk 

Management and Capital Markets Division of the OTS, Washington, DC. You may access this bulletin at 

our web site: www.ots.treas.gov. If you wish to purchase a handbook and a subscription to the updates, 

please contact the OTS Order Department at (301) 645-6264. 

Regulatory Bulletin 34

In recent years, wholesale borrowings, including Federal Home Loan Bank advances, have become an increasing important source of funding for some savings associations. Wholesable borrowings frequently 

have attractive features, and can, if properly assessed and prudently managed, facilitate the management of 

interest rate and liquidity risks. The initial cost of the borrowings is often low when compared to other liabilities with similar maturities. However, certain wholesale borrowing instruments contain embedded 

options that can increase borrowing costs under certain circumstances. If not properly evaluated and prudently managed, these instruments have the potential to significantly increase an institution's sensitivity to 

interest rate and liquidity risks. 

The growing use of wholesale borrowings and risks associated with the complex instruments make it increasingly important for examiners to assess the risks associated with these funding sources. Examiners 

should take the following steps, as appropriate, when evaluating a savings association with material 

amounts of wholesale borrowings:

1. Review borrowing concentrations. The examiner should review the institution’s wholesale borrowings to determine whether the amount of borrowings from a single source poses an undue risk.

2. Review borrowing contracts. The examiner should review the institution’s borrowing contracts 

for embedded options or other features that may affect the institution's interest rate and liquidity 

risks. In addition, examiners should review the collateral agreements for fees; collateral maintenance requirements, including triggers for increases in collateral; and other features that may affect 

liquidity and earnings.
Regulatory Bulletin 34

Page 2 Office of Thrift Supervision

3. Review stress tests. Examiners should review the institution's compliance with Thrift Bulletin 

13a-2, Structured Advances. In particular, examiners should review the institution’s procedures 

for identifying and monitoring the risks of the various terms of each borrowing contract, including 

penalties and option features. Examiners should determine whether management or an independent 

third party completed stress tests before the institution entered into the borrowing agreement, as 

well as periodically thereafter. The stress tests employed should cover a reasonable range of contractual triggers and external events, such as interest rate changes that may result in the exercise of 

embedded options or the termination of the borrowing agreement. In general, stress test results 

should depict the potential impact of these variables on the individual borrowing facility, as well as 

on the overall earnings and liquidity position of the institution. 

4. Review CMR Reporting and Impact on Interest Rate Risk Exposure. Examiners should determine whether the institution has reported properly its complex borrowings on schedule CRM. In 

addition, examiners should assess the effect of the use of complex borrowings on the institution’s 

interest rate risk exposure. 

5. Evaluate contingency plans. Examiners should evaluate management processes for controlling liquidity and interest rate risks arising from wholesale borrowings. Proper controls include 

contingent funding plans in the event that borrowings or lines are terminated prior to the original 

expected maturity.

6. Board and Senior Management Review. Examiners should determine whether the asset/liability 

management committee or board of directors, as appropriate, is fully informed of the risks of complex wholesale borrowing agreements prior to engaging in the transactions, as well as on an 

ongoing basis. 

7. Suitability and Appropriateness. Examiners should determine whether the instruments being 

used by the savings association are consistent with both the portfolio objectives of the institution 

and the level of sophistication of the institution's risk management practices. Institutions without 

the technical knowledge and risk management systems sufficient to adequately identify, monitor, 

and control the risks of complex wholesale borrowings should not use this funding.

Reliance on wholesale borrowings is consistent with safe and sound practices when management understands the risks of these activities and has systems and procedures in place to properly monitor and control 

the risks. Supervisors and examiners should take appropriate follow-up steps with respect to institutions 

that utilize complex funding instruments without an adequate understanding of the risks or without proper 

risk management systems and controls. Examiners should also seek corrective action when funding instruments or strategies are inconsistent with safe and sound practices.

 

—Scott M. Albinson

 Managing Director, Supervision