Office of Thrift Supervision Page 1 of 8

Office of Thrift Supervision June 19, 2001

Department of the Treasury

Thrift Bulletin

TB 77 

Handbook: Thrift Activities Section: 530 

Subject: Cash Flow and Liquidity

Sound Practices for

Liquidity Management at Savings Associations

Summary: This Thrift Bulletin provides guidance to management and boards of directors of thrift

institutions on liquidity management. OTS recently repealed 12 CFR Part 566, Liquidity, with an

interim rule published March 15, 2001. The interim rule still requires thrifts to maintain adequate

liquidity to assure safe and sound operation.

For Further Information Contact: Your OTS Regional Office or the OTS Risk Management and

Industry Analysis Division.

Thrift Bulletin 77

I. Introduction

Liquidity is the ability to fund assets and meet obligations as they come due. Liquidity risk is the

risk of not being able to obtain funds at a reasonable price within a reasonable period of time to meet 

financial commitments when due. A savings association should measure its liquidity position on an 

ongoing basis and estimate how funding requirements are likely to evolve over time and under

various scenarios, such as a significant decrease in the availability of wholesale funding. The crucial 

elements of sound liquidity management are clearly written policies, well-defined responsibilities,

strong management information systems, sound forecasting and analysis, thoughtful contingency

planning, and diversification and management of funding sources.

Each institution should have a written strategy for the day-to-day management of liquidity. The

liquidity strategy should define the institution’s general approach to managing liquidity, including

various quantitative and qualitative targets. The liquidity strategy should cover specific policies on

the composition of assets and liabilities, the use of wholesale funding, and strategies for addressing

temporary and long-term liquidity disruptions. The sophistication of an institution’s policies,

procedures, and information systems for managing liquidity should be related to the strength and

stability of its core deposit base, the variability of its cash flows, and its overall financial condition. 
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II. Liquidity Management

A. Board and Senior Management Oversight

Effective oversight is an integral part of an effective liquidity management program. The board 

and senior management should understand their oversight responsibilities.

Board of Directors. The board of directors should establish the institution’s tolerance for 

liquidity risk and approve significant policies related to liquidity management. The board 

should also ensure senior management takes the necessary steps to monitor and control

liquidity risk. The board should understand the nature and level of the institution’s 

liquidity risk, and management should inform the board regularly of the liquidity position 

of the institution. 

Senior Management. Senior management should effectively manage the liquidity

position of the institution and ensure that appropriate liquidity policies and procedures are 

established and maintained. 

• The institution’s board of directors usually delegates responsibility for managing the

institution’s overall liquidity to a specific committee of senior managers, such as the

Asset/Liability Committee (ALCO) or the finance committee, or to a specific unit,

such as the treasury unit. 

• Senior management should establish procedures, guidelines, and limits for managing 

and monitoring liquidity to ensure adequate liquidity is maintained at all times. 

• Senior management should prepare contingency funding plans. 

• Senior management should review the institution’s liquidity position on a regular

basis and monitor internal and external factors and events that could have a bearing

on the institution’s liquidity. 

• Senior management should review periodically the institution’s liquidity strategies,

policies, and procedures.

 

B. Policies and Procedures

A savings association should have clearly defined policies and procedures for managing

liquidity. The board of directors has ultimate responsibility for the adequacy of policies and

procedures; senior management has responsibility for their design and implementation. 

Policies and procedures should:

• Delineate lines of responsibility and identify individuals or committees responsible

for managing and monitoring liquidity risk. 

• Describe an overall liquidity strategy. The liquidity strategy should define the

general approach the institution will follow in managing liquidity, including various

quantitative and qualitative targets. The liquidity strategy should cover specific

policies on the composition of assets and liabilities, including policies on investment 

in illiquid securities and the use of wholesale funding. There should also be a written 

strategy for addressing temporary and long-term liquidity disruptions. 
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• Establish a process for measuring and monitoring liquidity. Although a number of

procedures for measuring and monitoring liquidity can be used, the most effective

procedures involve pro-forma cash flow projections. These range from simple

calculations to complex models for projecting cash inflows and outflows over

different planning periods (time bands) to identify cash shortfalls and surpluses in

future periods. While liquidity measures based on balance sheet ratios are useful in

measuring an institution’s current liquidity position and in monitoring trends in

liquidity, management should focus its attention on forward looking, pro-forma 

measures of liquidity. 

• Establish quantitative guidelines and limits to ensure adequate liquidity. Guidelines

and limits will vary depending on the nature of an institution’s operations and

circumstances. Guidelines could be set, for example, on the size of cash flow

mismatches over specified time horizons.1 Limits can also be tied to balance sheet

ratios. 

Examples:

∗ Maximum projected cash flow shortfall tolerated for specified time period 

(for example, one week ahead, one month ahead, one quarter ahead) 

∗ Minimum ratio of liquid assets to total assets

∗ Maximum overnight borrowings to total assets

∗ Maximum ratio of FHLB advances to total assets 

∗ Maximum ratio of brokered deposits to total assets

∗ Maximum ratio of total wholesale borrowings to total assets

• Establish control procedures to ensure adherence to policies and procedures.

• Define the necessary procedures for approvals of exceptions to policies, limits, and

authorizations. Positions that exceed established limits should receive the prompt

attention of appropriate management and should be resolved according to the process 

described in approved policies.

• Establish a schedule for the periodic review of the liquidity policies and procedures. 

Periodic reviews of the liquidity management process and related procedures should

address any significant changes in liquidity risk limits, liquidity strategy, information 

systems, and internal controls that have occurred since the last review.

C. Management Information Systems

Each institution should have adequate information systems for measuring, monitoring, and

controlling liquidity risk. 

• A management information system should provide timely information on the

institution’s current and prospective liquidity position.

 

1

 Because of the subjective nature of the numbers to be found in pro-forma cash flow projections, institutions may 

find it impractical to establish precise risk limits or precise rules for addressing cash flow mismatches that are 

projected to occur in future periods. Nevertheless, an institution should make an effort to define its tolerance for 

cash flow mismatches and should establish strategies for addressing them. 
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• An institution should be able to project its liquidity position over various time

horizons and scenarios. 

• An institution should clearly define assumptions used in projections so that

management can evaluate their appropriateness and validity. 

• The information system should provide the data needed by management to determine 

compliance with the institution's liquidity policies, procedures, and limits.

III. Measuring and Monitoring Liquidity

A. Net Funding Requirements

Each institution should establish a process for measuring and monitoring net funding

requirements.

• Liquidity measurement involves forecasting cash inflows and outflows over various

time horizons to identify potential cash imbalances.

• A cash flow forecast is a useful device to compare cash inflows and outflows on a

daily basis (see Appendix A) and over future periods (see Appendix B). 

• A common practice is to project net funds deficits for short-term (next 5-10 days) and 

long-term planning intervals (3-6 months, 6-12 months). Management should take

steps to address projected net funding deficits in a timely manner. By projecting cash 

flows for short- and long-term planning periods, management can significantly

reduce the risk that sizable net funds deficits go unnoticed and unattended.

• Management and other staff responsible for managing overall liquidity should be

aware of any information, such as a pending decline in earnings, an impending legal

action, or a downgrade by a rating agency that could have an adverse impact on

perceptions about the financial condition of the institution.

B. Scenario Analysis 

Management should consider a variety of scenarios, including stressful scenarios, for analyzing 

liquidity. 

• An institution’s liquidity depends on the behavior of cash flows under different

conditions. A thorough analysis of various liquidity scenarios should include both 

internal and external events that could trigger significant cash flow disruptions.

• Scenarios should include a range of possible future environments, including

optimistic, pessimistic, and status quo. Stressful events might include a loss of

wholesale funding, a significant run-off of deposits, or a sharp increase in loan

demand.

• Cash flow timing can differ among scenarios and the assumptions may differ quite

sharply. For example, in a general market crisis, the capacity to sell assets may

deteriorate significantly.

• An institution should review periodically the assumptions utilized in managing and

forecasting liquidity needs. 
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• In estimating normal funding needs, some institutions use historical data and account 

for seasonal and other effects believed to determine loan demand and deposit flows. 

Alternatively, some institutions rely on judgmental business projections, or undertake 

a customer-by-customer assessment for larger customers and apply historical

relationships to the remainder.

• An institution should examine the potential for substantial unanticipated cash

outflows from its derivatives and off balance-sheet activities. Potential cash outflows 

include loan commitments; calls on loans sold with recourse and financial guarantees; 

payments on swap contracts and other financial derivatives; margin calls; early

termination agreements; and so forth. 

IV. Contingency Planning

Each institution should have a contingency plan for handling unanticipated stressful scenarios that

could result in a significant erosion of institution-specific or general-market liquidity. The plan

should be updated on a regular basis. A contingency plan should:

• Define responsibilities and decision-making authority so that all personnel understand what

their role is during a problem situation.

• Assess the potential for funding erosion (magnitude and rate of outflow) by source of funds

under different scenarios. 

• Assess the potential liquidity risk posed by other activities such as asset sales and

securitization programs.

• Identify and assess the adequacy of financial resources (source of funds) for contingent

needs.2

• Identify the sequence in which key sources of funds will be mobilized and committed for

contingent needs. 3

• Identify other actions to be taken in the event of an unexpected contingency.

• Address implementation issues such as procedures by which resources are committed for

emergency use or released from one use and transferred to another. 

V. Managing Access to Funding Sources

Savings associations should carefully manage their access to available sources of funding and

understand their funding options. 

• An institution should periodically review its efforts to build and maintain relationships with a 

broad range of depositors and other funds providers. An institution should understand how

much funding might be available from various sources under normal and adverse

circumstances. 

 

2

 The plan should identify any back-up facilities (lines of credit), the conditions related to their use, and the

circumstances where the association might use them. Management should understand the various conditions, such as 

notice periods, that could affect access to back-up lines.

3

 The degree of uncertainty as to the magnitude and timing of availability of resources may call for different 

priorities in different situations.
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• Senior management should be aware of the composition, characteristics, and diversification

of its funding sources. 

• Management should consider developing or expanding markets for asset sales or exploring

arrangements for borrowing against assets. 

3⁄4 Scott M. Albinson

Managing Director, Supervision
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Appendix A

Sample Short-term Liquidity Forecast

Day 1 Day 2 Day 3 Day 4 Day 5 Days 

6-10

Cash inflows 100 120 130 100 120 620

Cash outflows 90 130 100 150 150 510

Net surplus 

(deficit)

 10 (10) 30 (50) (30) 110

Cumulative net 

surplus (deficit)

 10 0 30 (20) (50) 60

Beginning liquid 

cash surplus4

25 35 25 55 5 0

Plus: Net surplus 

(deficit)

10 (10) 30 (50) (30) 110

Ending liquid cash 

surplus

 35 25 55 5 (25) 110

Net cash shortfall 0 0 0 0 2550

 

4

 The liquid cash surplus is the level of cash and cash equivalents in excess of transactions balances required for 

day-to-day operations and any minimum reserve of cash for contingencies.

5

 The institution would have to close the projected cash shortfall by increasing cash inflows (for instance by 

borrowing) or by reducing cash outflows on or before day 5 to avoid dipping into the reserve for contingencies. The 

beginning liquid cash surplus on day 6 of zero ($0) assumes that management will address the net cash shortfall on 

day 5 by taking some action. Of course, management may address that shortfall before day 5.
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Appendix B

Sample Long-Term Liquidity Forecast

Scenario No. 1: Most Likely Forecast

Date: __________________

 

Forecast 

0-30 days

Forecast 

31 –60 days

Forecast

61-90 days

Forecast 

91-365 days

Cash Inflows:

Deposits

Maturing loans and investments

Loan sales

Other

 $1,000

 600

0

200

$1,200

1,200

0

100

$1,500

1,800

0

200

$20,000

9,000

0

1,500

Total Inflows $1,800 $2,500 $3,500 $30,500

Cash Outflows:

Maturing deposits 

Maturing debt

New Loans

Other

800

0

900

200

900

0

1,500

0

1,000

0

1,600

0

3,500

1,000

15,000

1,000

Total Outflows $1,900 $2,400 $2,600 $19,500

Net Surplus (deficit) ($100) $100 $900 $11,000

Cumulative net surplus (deficit) ($100) 0 $1,000 $12,000

Scenario No. 2: 20% Reduction in Deposit Inflows 

Date: __________________

Forecast 

0-30 days

Forecast 

31 –60 days

Forecast 

61-90 days

Forecast 

91-365 days

Cash Inflows:

Deposits

Maturing loans and investments

Loan sales

Other

$800

600

0

200

$960

1,200

0

100

$1,200

1,800

0

200

$16,000

9,000

0

1,500

Total Inflows $1,600 $2,260 $3,200 $26,500

Cash Outflows:

Maturing deposits 

Maturing debt

New Loans

Other

800

0

900

200

900

0

1,500

0

1,000

0

1,600

0

3,500

1,000

15,000

1,000

Total Outflows $1,900 $2,400 $2,600 $19,500

Net Surplus (deficit) ($300) ($140) $600 $11,000

Cumulative net surplus (deficit) ($300) ($440) $160 $12,000