Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 32035 

DATES: Written comments should be 

received on or before September 4, 2009 

to be assured of consideration. 

ADDRESSES: Direct all written comments 

to R. Joseph Durbala, Internal Revenue 

Service, Room 6129, 1111 Constitution 

Avenue, NW., Washington, DC 20224. 

FOR FURTHER INFORMATION CONTACT: 

Requests for additional information or 

copies of the form and instructions 

should be directed to Dawn Bidne at 

Internal Revenue Service, Room 6129, 

1111 Constitution Avenue, NW., 

Washington, DC 20224, or at (202) 622– 

3933, or through the Internet at 

Dawn.E.Bidne@irs.gov. 

SUPPLEMENTARY INFORMATION: 

Title: Excise Tax on Structured 

Settlement Factoring Transactions. 

OMB Number: 1545–1826. 

Form Number: 8876. 

Abstract: Form 8876 is used to report 

structured settlement transactions and 

pay the applicable excise tax. 

Current Actions: There are no changes 

being made to the form at this time. 

Type of Review: Extension of a 

currently approved collection. 

Affected Public: Business or other forprofit organizations and individuals. 

Estimated Number of Respondents: 

100. 

Estimated Time per Respondent: 5 

hours, 36 minutes. 

Estimated Total Annual Burden 

Hours: 560. 

The following paragraph applies to all 

of the collections of information covered 

by this notice: 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection of information 

displays a valid OMB control number. 

Books or records relating to a collection 

of information must be retained as long 

as their contents may become material 

in the administration of any internal 

revenue law. Generally, tax returns and 

tax return information are confidential, 

as required by 26 U.S.C. 6103. 

Request for Comments: Comments 

submitted in response to this notice will 

be summarized and/or included in the 

request for OMB approval. All 

comments will become a matter of 

public record. 

Comments are invited on: (a) Whether 

the collection of information is 

necessary for the proper performance of 

the functions of the agency, including 

whether the information shall have 

practical utility; (b) the accuracy of the 

agency’s estimate of the burden of the 

collection of information; (c) ways to 

enhance the quality, utility, and clarity 

of the information to be collected; (d) 

ways to minimize the burden of the 

collection of information on 

respondents, including through the use 

of automated collection techniques or 

other forms of information technology; 

and (e) estimates of capital or start-up 

costs and costs of operation, 

maintenance, and purchase of services 

to provide information. 

Approved: June 22, 2009. 

R. Joseph Durbala, 

IRS Reports Clearance Officer. 

[FR Doc. E9–15725 Filed 7–2–09; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

[Docket ID OCC–2009–0009] 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1362] 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

DEPARTMENT OF THE TREASURY 

Office of Thrift Supervision 

[Docket ID OTS–2009–0011] 

NATIONAL CREDIT UNION 

ADMINISTRATION 

Proposed Interagency Guidance— 

Funding and Liquidity Risk 

Management 

AGENCIES: Office of the Comptroller of 

the Currency, Treasury (OCC); Board of 

Governors of the Federal Reserve 

System (FRB); Federal Deposit 

Insurance Corporation (FDIC); Office of 

Thrift Supervision, Treasury (OTS); and 

National Credit Union Administration 

(NCUA). 

ACTION: Notice with request for 

comment. 

SUMMARY: The OCC, FRB, FDIC, OTS, 

and NCUA (the Agencies) in 

conjunction with the Conference of 

State Bank Supervisors (CSBS), request 

comment on the proposed guidance on 

funding and liquidity risk management 

(proposed Guidance). The proposed 

Guidance summarizes the principles of 

sound liquidity risk management that 

the agencies have issued in the past and, 

where appropriate, brings them into 

conformance with the ‘‘Principles for 

Sound Liquidity Risk Management and 

Supervision’’ issued by the Basel 

Committee on Banking Supervision 

(BCBS) in September 2008. While the 

BCBS liquidity principles primarily 

focuses on large internationally active 

financial institutions, the proposed 

guidance emphasizes supervisory 

expectations for all domestic financial 

institutions including banks, thrifts and 

credit unions. 

DATES: Comments must be submitted on 

or before September 4, 2009. 

ADDRESSES: Comments should be 

directed to: 

OCC: Because paper mail in the 

Washington, DC area and at the 

Agencies is subject to delay, 

commenters are encouraged to submit 

comments by e-mail, if possible. Please 

use the title ‘‘Proposed Interagency 

Guidance—Funding and Liquidity Risk 

Management’’ to facilitate the 

organization and distribution of the 

comments. You may submit comments 

by any of the following methods: 

• E-mail: 

regs.comments@occ.treas.gov. 

• Mail: Office of the Comptroller of 

the Currency, 250 E Street, SW., Mail 

Stop 2–3, Washington, DC 20219. 

• Fax: (202) 874–5274. 

• Hand Delivery/Courier: 250 E 

Street, SW., Mail Stop 2–3, Washington, 

DC 20219. 

Instructions: You must include 

‘‘OCC’’ as the agency name and ‘‘Docket 

ID OCC–2009–0009’’ in your comment. 

In general, OCC will enter all comments 

received into the docket without 

change, including any business or 

personal information that you provide 

such as name and address information, 

e-mail addresses, or phone numbers. 

Comments received, including 

attachments and other supporting 

materials, are part of the public record 

and subject to public disclosure. Do not 

enclose any information in your 

comment or supporting materials that 

you consider confidential or 

inappropriate for public disclosure. 

You may review comments and other 

related materials that pertain to this 

notice by any of the following methods: 

• Viewing Comments Personally: You 

may personally inspect and photocopy 

comments at the OCC, 250 E Street, 

SW., Washington, DC. For security 

reasons, the OCC requires that visitors 

make an appointment to inspect 

comments. You may do so by calling 

(202) 874–4700. Upon arrival, visitors 

will be required to present valid 

government-issued photo identification 

and submit to security screening in 

order to inspect and photocopy 

comments. 

• Docket: You may also view or 

request available background 

documents and project summaries using 

the methods described above. 

FRB: You may submit comments, 

identified by Docket No. OP–1362, by 

any of the following methods: 

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32036 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Fax: 202/452–3819 or 202/452– 

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the FRB’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed in electronic or 

paper form in Room MP–500 of the 

FRB’s Martin Building (20th and C 

Streets, NW.) between 9 a.m. and 5 p.m. 

on weekdays. 

FDIC: You may submit comments by 

any of the following methods: 

• Agency Web Site: http:// 

www.fdic.gov/regulations/laws/federal. 

Follow instructions for submitting 

comments on the Agency Web site. 

• E-mail: Comments@FDIC.gov. 

Include ‘‘Proposed Interagency 

Guidance—Funding and Liquidity 

Management Risk’’ in the subject line of 

the message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429. 

• Hand Delivery/Courier: Guard 

station at the rear of the 550 17th Street 

Building (located on F Street) on 

business days between 7 a.m. and 5 p.m. 

(EST). 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Public Inspection: All comments 

received will be posted without change 

to http://www.fdic.gov/regulations/laws/ 

federal, including any personal 

information provided. Comments may 

be inspected and photocopied in the 

FDIC Public Information Center, 3501 

North Fairfax Drive, Room E–1002, 

Arlington, VA 22226, between 9 a.m. 

and 5 p.m. (EST) on business days. 

Paper copies of public comments may 

be ordered from the Public Information 

Center by telephone at (877) 275–3342 

or (703) 562–2200. 

OTS: You may submit comments, 

identified by OTS–2009–0011, by any of 

the following methods: 

• E-mail address: 

regs.comments@ots.treas.gov. Please 

include ID OTS–2009–0011 in the 

subject line of the message and include 

your name and telephone number in the 

message. 

• Fax: (202) 906–6518. 

• Mail: Regulation Comments, Chief 

Counsel’s Office, Office of Thrift 

Supervision, 1700 G Street, NW., 

Washington, DC 20552, Attention: ID 

OTS–2009–0011. 

• Hand Delivery/Courier: Guard’s 

Desk, East Lobby Entrance, 1700 G 

Street, NW., from 9 a.m. to 4 p.m. on 

business days, Attention: Regulation 

Comments, Chief Counsel’s Office, 

Attention: ID OTS–2009–0011. 

Instructions: All submissions received 

must include the agency name and 

docket number for this notice. All 

comments received will be posted to the 

OTS Internet Site at http://www.ots.

treas.gov/Supervision&Legal.Laws&

Regulations without change, including 

any personal information provided. 

Comments including attachments and 

other supporting materials received are 

part of the public record and subject to 

public disclosure. Do not enclose any 

information in your comments or 

supporting materials that you consider 

confidential or inappropriate for public 

disclosure. 

• Viewing Comments On-Site: You 

may inspect comments at the Public 

Reading Room, 1700 G Street, NW., by 

appointment. To make an appointment 

for access, call (202) 906–5922, send an 

e-mail to public.info@ots.treas.gov, or 

send a facsimile transmission to (202) 

906–6518. (Prior notice identifying the 

materials you will be requesting will 

assist us in serving you.) We schedule 

appointments on business days between 

10 a.m. and 4 p.m. In most cases, 

appointments will be available the next 

business day following the date we 

receive a request. 

NCUA: You may submit comments by 

any of the following methods (Please 

send comments by one method only): 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

NCUA Web Site: http:// 

www.ncua.gov/Resources/ 

RegulationsOpinionsLaws/ 

ProposedRegulations.aspx. Follow the 

instructions for submitting comments. 

• E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on Proposed 

Interagency Guidance—Funding and 

Liquidity Risk Management,’’ in the 

e-mail subject line. 

• Fax: (703) 518–6319. Use the 

subject line described above for e-mail. 

• Mail: Address to Mary F. Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

• Hand Delivery/Courier: Same as 

mail address. 

Public inspection: All public 

comments are available on the agency’s 

Web site at http://www.ncua.gov/ 

Resources/RegulationsOpinionsLaws/ 

ProposedRegulations.aspx as submitted, 

except as may not be possible for 

technical reasons. Public comments will 

not be edited to remove any identifying 

or contact information. Paper copies of 

comments may be inspected in NCUA’s 

law library, at 1775 Duke Street, 

Alexandria, Virginia 22314, by 

appointment weekdays between 9 a.m. 

and 3 p.m. To make an appointment, 

call (703) 518–6546 or send an e-mail to 

OGC Mail @ncua.gov. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Kerri Corn, Director for Market 

Risk, Credit and Market Risk Division, 

(202) 874–5670 or J. Ray Diggs, Group 

Leader: Balance Sheet Management, 

Credit and Market Risk Division, (202) 

874–5670. 

FRB: James Embersit, Deputy 

Associate Director, Market and 

Liquidity Risk, 202–452–5249 or Mary 

Arnett, Supervisory Financial Analyst, 

Market and Liquidity Risk, 202–721– 

4534 or Brendan Burke, Supervisory 

Financial Analyst, Supervisory Policy 

and Guidance, 202–452–2987 

FDIC: Kyle Hadley, Chief Capital 

Markets Examination Support, (202) 

898–6532. 

OTS: Jeff Adams, Capital Markets 

Specialist, Risk Modeling and Analysis, 

(202) 906–6388 or Marvin Shaw, Senior 

Attorney, Regulations and Legislation 

Division, (202) 906–6639. 

NCUA: John Bilodeau, Program 

Officer, Examination and Insurance, 

(703) 518–6618. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The recent turmoil in the financial 

markets emphasizes the importance of 

good liquidity risk management to the 

safety and soundness of financial 

institutions. Supervisors worked on an 

international and national level through 

various groups (e.g., Basel Committee on 

Banking Supervision, Senior 

Supervisors Group, Financial Stability 

Forum) to assess the implications from 

the current market conditions on an 

institution’s assessment of liquidity risk 

and the supervisor’s approach to 

liquidity risk supervision. The industry 

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Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 32037 

through the Institute of International 

Finance (IIF) also performed work in the 

area of liquidity risk and issued 

guidelines in 2008. Additionally, 

supervisors in Europe and Asia have 

also worked on domestic liquidity 

guidance. This guidance focuses on all 

domestic financial institutions, 

including banks, thrifts, and credit 

unions. The proposed guidance 

emphasizes the key elements of 

liquidity risk management already 

addressed separately by the agencies, 

and provides consistent interagency 

expectations on sound practices for 

managing funding and liquidity risk. 

II. Request for Comment 

The agencies request comments on all 

aspects of the proposed guidance. 

III. Paperwork Reduction Act 

In accordance with section 3512 of 

the Paperwork Reduction Act of 1995, 

44 U.S.C. 3501–3521 (PRA), the 

Agencies may not conduct or sponsor, 

and the respondent is not required to 

respond to, an information collection 

unless it displays a currently valid 

Office of Management and Budget 

(OMB) control number. 

Comments are invited on: 

(a) Whether the collection of 

information is necessary for the proper 

performance of the Federal banking 

agencies’ functions, including whether 

the information has practical utility; 

(b) The accuracy of the estimates of 

the burden of the information 

collection, including the validity of the 

methodology and assumptions used; 

(c) Ways to enhance the quality, 

utility, and clarity of the information to 

be collected; 

(d) Ways to minimize the burden of 

the information collection on 

respondents, including through the use 

of automated collection techniques or 

other forms of information technology; 

and 

(e) Estimates of capital or start up 

costs and costs of operation, 

maintenance, and purchase of services 

to provide information. 

All comments will become a matter of 

public record. Comments should be 

addressed to: 

OCC: Please follow the instructions 

found in the ADDRESSES caption above 

for submitting comments. 

FRB: Please follow the instructions 

found in the ADDRESSES caption above 

for submitting comments. 

FDIC: Interested parties are invited to 

submit written comments to the FDIC by 

any of the following methods. All 

comments should refer to the name of 

the collection: 

• http://www.FDIC.gov/regulations/ 

laws/federal/notices.html 

• E-mail: comments@fdic.gov Include 

the name of the collection in the subject 

line of the message. 

• Mail: Leneta G. Gregorie (202–898– 

3719), Counsel, Room F–1064, Federal 

Deposit Insurance Corporation, 550 17th 

Street NW., Washington, DC 20429. 

• Hand Delivery: Comments may be 

hand-delivered to the guard station at 

the rear of the 17th Street Building 

(located on F Street), on business days 

between 7 a.m. and 5 p.m. 

OTS: Please follow the instructions 

found in the ADDRESSES caption above 

for submitting comments. 

NCUA: Please follow the instructions 

found in the ADDRESSES caption above 

for submitting comments. 

All Agencies: A copy of the comments 

may also be submitted to the OMB desk 

officer for the Agencies: Office of 

Information and Regulatory Affairs, 

Office of Management and Budget, New 

Executive Office Building, Washington, 

DC 20503. 

Title of Information Collection: 

Funding and Liquidity Risk 

Management. 

OMB Control Numbers: New 

collection; to be assigned by OMB. 

Abstract: Section 14 states that 

institutions should consider liquidity 

costs, benefits, and risks in strategic 

planning and budgeting processes. 

Significant business activities should be 

evaluated for liquidity risk exposure as 

well as profitability. More complex and 

sophisticated institutions should 

incorporate liquidity costs, benefits, and 

risks in the internal product pricing, 

performance measurement, and new 

product approval process for all 

material business lines, products and 

activities. Incorporating the cost of 

liquidity into these functions should 

align the risk-taking incentives of 

individual business lines with the 

liquidity risk exposure their activities 

create for the institution as a whole. The 

quantification and attribution of 

liquidity risks should be explicit and 

transparent at the line management 

level and should include consideration 

of how liquidity would be affected 

under stressed conditions. 

Section 20 would require that 

liquidity risk reports provide aggregate 

information with sufficient supporting 

detail to enable management to assess 

the sensitivity of the institution to 

changes in market conditions, its own 

financial performance, and other 

important risk factors. Institutions 

should also report on the use of and 

availability of government support, such 

as lending and guarantee programs, and 

implications on liquidity positions, 

particularly since these programs are 

generally temporary or reserved as a 

source for contingent funding. 

Affected Public: 

OCC: National banks, their 

subsidiaries, and Federal branches or 

agencies of foreign banks. 

FRB: Bank holding companies and 

state member banks. 

FDIC: Insured state nonmember 

banks. 

OTS: Federal savings associations and 

their affiliated holding companies. 

NCUA: Federally-insured credit 

unions. 

Type of Review: Regular. 

Estimated Burden: 

OCC: 

Number of respondents: 1,560 total 

(13 large (over $100 billion in assets), 29 

mid-size ($10–$100 billion), 1,518 small 

(less than $10 billion)). 

Burden under Section 14: 720 hours 

per large respondent, 240 hours per 

mid-size respondent, and 80 hours per 

small respondent. 

Burden under Section 20: 4 hours per 

month. 

Total estimated annual burden: 

212,640 hours. 

FRB: 

Number of respondents: 5,892 total 

(26 large (over $100 billion in assets), 71 

mid-size ($10–$100 billion), 5,795 small 

(less than $10 billion)). 

Burden under Section 14: 720 hours 

per large respondent, 240 hours per 

mid-size respondent, and 80 hours per 

small respondent. 

Burden under Section 20: 4 hours per 

month. 

Total estimated annual burden: 

782,176 hours. 

FDIC: 

Number of respondents: 5,076 total 

(10 large (over $20 billion in assets), 309 

mid-size ($1–$20 billion), 4,757 small 

(less than $1 billion)). 

Burden under Section 14: 720 hours 

per large respondent, 240 hours per 

mid-size respondent, and 80 hours per 

small respondent. 

Burden under Section 20: 4 hours per 

month. 

Total estimated annual burden: 

705,564. 

OTS: 

Number of respondents: 801 total (14 

large (over $100 billion in assets), 104 

mid-size ($10–$100 billion), 683 small 

(less than $10 billion)). 

Burden under Section 14: 720 hours 

per large respondent, 240 hours per 

mid-size respondent, and 80 hours per 

small respondent. 

Burden under Section 20: 4 hours per 

month. 

Total estimated annual burden: 

128,128. 

NCUA: 

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32038 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 

1The various state banking supervisors may 

implement this policy statement through their 

individual supervisory process. 

2For national banks, see the Comptroller’s 

Handbook on Liquidity. For state member banks 

and bank holding companies, see the Federal 

Reserve’s Commercial Bank Examination Manual 

(section 4020), Bank Holding Company Supervision 

Manual (section 4010), and Trading and Capital 

Markets Activities Manual (section 2030). For State 

non-member banks, see the FDIC’s Revised 

Examination Guidance for Liquidity and Funds 

Management (Trans. No. 2002–01) (Nov. 19, 2001) 

as well as Financial Institution Letter 84–2008, 

Liquidity Risk Management (August 2008). For 

savings associations, see the Office of Thrift 

Supervision’s Examination Handbook, section 530, 

‘‘Cash Flow and Liquidity Management’’; and the 

Holding Companies Handbook, section 600. For 

credit unions, see Letter to Credit Unions No. 02– 

CU–05, Examination Program Liquidity 

Questionnaire (March 2002). Also see Basel 

Committee on Banking Supervision, ‘‘Principles for 

Sound Liquidity Risk Management and 

Supervision,’’ (September 2008). 

3Basel Committee on Banking Supervision, 

‘‘Principles for Sound Liquidity Risk Management 

and Supervision’’, September 2008. See http:// 

www.bis.org/publ/bcbs144.htm. Federally-insured 

credit unions are not subject to principles issued by 

the Basel Committee. 4Unless otherwise indicated, this interagency 

guidance uses the term ‘‘financial institutions’’ or 

‘‘institutions’’ to include banks, saving associations, 

credit unions, and affiliated holding companies. 

Federally-insured credit unions (FICUs) do not have 

holding company affiliations and therefore 

references to holding companies contained within 

this guidance are not applicable to FICUs. 

Number of respondents: 7,736 total 

(153 large (over $1 billion in assets), 501 

mid-size ($250 million to $1 billion), 

and 7,082 small (less than $250 

million)). 

Burden under Section 14: 240 hours 

per large respondent, 80 hours per midsize respondent, and 20 hours per small 

respondent. 

Burden under Section 20: 2 hours per 

month. 

Total estimated annual burden: 

404,104. 

IV. Guidance 

The text of the proposed Guidance on 

Funding and Liquidity Risk 

Management is as follows: 

Interagency Guidance on Funding and 

Liquidity Risk Management 

1. The Office of the Comptroller of the 

Currency (OCC), Board of Governors of 

the Federal Reserve System (FRB), 

Federal Deposit Insurance Corporation 

(FDIC), the Office of Thrift Supervision 

(OTS), and the National Credit Union 

Administration (NCUA) (collectively, 

‘‘the agencies’’) in conjunction with the 

Conference of State Bank Supervisors 

(CSBS) 1 are issuing this guidance to 

provide consistent interagency 

expectations on sound practices for 

managing funding and liquidity risk. 

The guidance summarizes the principles 

of sound liquidity risk management that 

the agencies have issued in the past 2

and, where appropriate, brings these 

principles into conformance with the 

international guidance recently issued 

by the Basel Committee on Banking 

Supervision titled ‘‘Principles for Sound 

Liquidity Risk Management and 

Supervision.3

2. Recent events illustrate that 

liquidity risk management at many 

financial institutions is in need of 

improvement. Deficiencies include 

insufficient holdings of liquid assets, 

funding risky or illiquid asset portfolios 

with potentially volatile short-term 

liabilities, and a lack of meaningful cash 

flow projections and liquidity 

contingency plans. 

3. The following guidance reiterates 

the process that institutions should 

follow to appropriately identify, 

measure, monitor and control their 

funding and liquidity risk. In particular, 

the guidance re-emphasizes the 

importance of cash flow projections, 

diversified funding sources, stress 

testing, a cushion of liquid assets, and 

a formal well-developed contingency 

funding plan (CFP) as primary tools for 

measuring and managing liquidity risk. 

The agencies expect all financial 

institutions 4 to manage liquidity risk 

using processes and systems that are 

commensurate with the institution’s 

complexity, risk profile, and scope of 

operations. Liquidity risk management 

processes and plans should be well 

documented and available for 

supervisory review. Failure to maintain 

an adequate liquidity risk management 

process is considered an unsafe and 

unsound practice. 

Liquidity and Liquidity Risk 

4. Liquidity is a financial institution’s 

capacity to meet its cash and collateral 

obligations at a reasonable cost. 

Maintaining an adequate level of 

liquidity depends on the institution’s 

ability to efficiently meet both expected 

and unexpected cash flows and 

collateral needs without adversely 

affecting either daily operations or the 

financial condition of the institution. 

5. Liquidity risk is the risk that an 

institution’s financial condition or 

overall safety and soundness is 

adversely affected by an inability (or 

perceived inability) to meet its 

contractual obligations. An institution’s 

obligations and the funding sources 

used to meet them depend significantly 

on its business mix, balance-sheet 

structure, and the cash-flow profiles of 

its on- and off-balance-sheet obligations. 

In managing their cash flows, 

institutions confront various situations 

that can give rise to increased liquidity 

risk. These include funding mismatches, 

market constraints on the ability to 

convert assets into cash or in accessing 

sources of funds (i.e., market liquidity), 

and contingent liquidity events. 

Changes in economic conditions or 

exposure to credit, market, operation, 

legal, and reputation risks also can 

affect an institution’s liquidity risk 

profile and should be considered in the 

assessment of liquidity and asset/ 

liability management. 

Sound Practices of Liquidity Risk 

Management 

6. An institution’s liquidity 

management process should be 

sufficient to meet its daily funding 

needs, and cover both expected and 

unexpected deviations from normal 

operations. Accordingly, institutions 

should have a comprehensive 

management process for identifying, 

measuring, monitoring and controlling 

liquidity risk. Because of the critical 

importance to the viability of the 

institution, liquidity risk management 

should be fully integrated into the 

institution’s risk management processes. 

Critical elements of sound liquidity risk 

management include: 

• Effective corporate governance 

consisting of oversight by the board of 

directors and active involvement by 

management in an institution’s control 

of liquidity risk. 

• Appropriate strategies, policies, 

procedures, and limits used to manage 

and mitigate liquidity risk. 

• Comprehensive liquidity risk 

measurement and monitoring systems 

(including assessments of the current 

and prospective cash flows or sources 

and uses of funds) that are 

commensurate with the complexity and 

business activities of the institution. 

• Active management of intraday 

liquidity and collateral. 

• An appropriately diverse mix of 

existing and potential future funding 

sources. 

• Adequate levels of highly liquid 

marketable securities free of legal, 

regulatory, or operational impediments 

that can be used to meet liquidity needs 

in stressful situations. 

• Comprehensive contingency 

funding plans (CFPs) that sufficiently 

address potential adverse liquidity 

events and emergency cash flow 

requirements. 

• Internal controls and internal audit 

processes sufficient to determine the 

adequacy of the institution’s liquidity 

risk management process. 

Supervisors will assess these critical 

elements in their reviews of an 

institution’s liquidity risk management 

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Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 32039 

5 In formulating liquidity management strategies, 

members of complex banking groups should take 

into consideration their legal structures (branches 

versus separate legal entities and operating 

subsidiaries), key business lines, markets, products, 

and jurisdictions in which they operate. 

6Financial instruments that are illiquid, difficult 

to value, marked by the presence of cash flows that 

are irregular, uncertain, or difficult to model. 

process in relation to its size, 

complexity, and scope of operations. 

Corporate Governance 

7. The board of directors is ultimately 

responsible for the liquidity risk 

assumed by the institution. As a result, 

the board should ensure that the 

institution’s liquidity risk tolerance is 

established and communicated in such 

a manner that all levels of management 

clearly understand the institution’s 

approach to managing the trade-offs 

between liquidity risk and profits. The 

board of directors or its delegated 

committee of board members should 

oversee the establishment and approval 

of liquidity management strategies, 

policies and procedures, and review 

them at least annually. In addition, the 

board should ensure that it: 

• Understands the nature of the 

liquidity risks of its institution and 

periodically reviews information 

necessary to maintain this 

understanding. 

• Establishes executive-level lines of 

authority and responsibility for 

managing the institution’s liquidity risk. 

• Enforces management’s duties to 

identify, measure, monitor, and control 

liquidity risk. 

• Understands and periodically 

reviews the institution’s CFPs for 

handling potential adverse liquidity 

events. 

• Comprehends the liquidity risk 

profiles of important subsidiaries and 

affiliates as appropriate. 

8. Senior management is responsible 

for ensuring that board-approved 

strategies, policies, and procedures for 

managing liquidity (on both a long-term 

and day-to-day basis) are appropriately 

executed within the lines of authority 

and responsibility designated for 

managing and controlling liquidity risk. 

This includes overseeing the 

development and implementation of 

appropriate risk measurement and 

reporting systems, liquid buffers of 

unencumbered marketable securities, 

CFPs, and an adequate internal control 

infrastructure. Senior management is 

also responsible for regularly reporting 

to the board of directors on the liquidity 

risk profile of the institution. 

9. Senior management should 

determine the structure, responsibilities, 

and controls for managing liquidity risk 

and for overseeing the liquidity 

positions of the institution. These 

elements should be clearly documented 

in liquidity risk policies and 

procedures. For institutions comprised 

of multiple entities, such elements 

should be fully specified and 

documented in policies for each 

material legal entity and subsidiary. 

Senior management should be able to 

monitor liquidity risks for each entity 

across the institution on an ongoing 

basis. Processes should be in place to 

ensure that the group’s senior 

management is actively monitoring and 

quickly responding to all material 

developments, and reporting to the 

board of directors as appropriate. 

10. Institutions should clearly identify 

the individuals or committees 

responsible for implementing and 

making liquidity risk decisions. When 

an institution uses an asset/liability 

committee (ALCO) or other similar 

senior management committee, the 

committee should actively monitor the 

institution’s liquidity profile and should 

have sufficiently broad representation 

across major institutional functions that 

can directly or indirectly influence the 

institution’s liquidity risk profile (e.g., 

lending, investment securities, 

wholesale and retail funding, etc.). 

Committee members should include 

senior managers with authority over the 

units responsible for executing 

liquidity-related transactions and other 

activities within the liquidity risk 

management process. In addition, the 

committee should ensure that the risk 

measurement system adequately 

identifies and quantifies risk exposure. 

The committee also should ensure that 

the reporting process communicates 

accurate, timely, and relevant 

information about the level and sources 

of risk exposure. 

Strategies, Policies, Procedures, and 

Risk Tolerances 

11. Institutions should have 

documented strategies for managing 

liquidity risk and clear policies and 

procedures for limiting and controlling 

risk exposures that appropriately reflect 

the institution’s risk tolerances. 

Strategies should identify primary 

sources of funding for meeting daily 

operating cash outflows, as well as 

seasonal and cyclical cash flow 

fluctuations. Strategies should also 

address alternative responses to various 

adverse business scenarios.5 Policies 

and procedures should provide for the 

formulation of plans and courses of 

actions for dealing with potential 

temporary, intermediate-term, and longterm liquidity disruptions. Policies, 

procedures, and limits also should 

address liquidity separately for 

individual currencies, legal entities, and 

business lines, when appropriate and 

material, as well as allow for legal, 

regulatory, and operational limits for the 

transferability of liquidity. Senior 

management should coordinate the 

institution’s liquidity risk management 

with disaster, contingency, and strategic 

planning efforts, as well as with 

business line and risk management 

objectives, strategies, and tactics. 

12. Policies should clearly articulate a 

liquidity risk tolerance that is 

appropriate for the business strategy of 

the institution considering its 

complexity, business mix, liquidity risk 

profile, and its role in the financial 

system. Policies should also contain 

provisions for documenting and 

periodically reviewing assumptions 

used in liquidity projections. Policy 

guidelines should employ both 

quantitative targets and qualitative 

guidelines. These measurements, limits, 

and guidelines may be specified in 

terms of the following measures and 

conditions, as applicable: 

• Cash flow projections that include 

discrete and cumulative cash flow 

mismatches or gaps over specified 

future time horizons under both 

expected and adverse business 

conditions. 

• Target amounts of unpledged liquid 

asset reserves. 

• Measures used to identify volatile 

liability dependence and liquid asset 

coverage ratios. For example, these may 

include ratios of wholesale funding to 

total liabilities, potentially volatile retail 

(e.g., high-cost or out-of-market) 

deposits to total deposits, and other 

liability dependency measures, such as 

short-term borrowings as a percent of 

total funding. 

• Asset concentrations that could 

increase liquidity risk through a limited 

ability to convert to cash (e.g., complex 

financial instruments,6 bank-owned 

(corporate-owned) life insurance, and 

less marketable loan portfolios). 

• Funding concentrations that 

address diversification of funding 

sources and types, such as large liability 

and borrowed funds dependency, 

secured versus unsecured funding 

sources, exposures to single providers of 

funds, exposures to funds providers by 

market segments, and different types of 

brokered deposits or wholesale funding. 

• Funding concentrations that 

address the term, re-pricing, and market 

characteristics of funding sources. This 

may include diversification targets for 

short-, medium- and long-term funding, 

instrument type and securitization 

vehicles, and guidance on 

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concentrations for currencies and 

geographical markets. 

• Contingent liability exposures such 

as unfunded loan commitments, lines of 

credit supporting asset sales or 

securitizations, and collateral 

requirements for derivatives 

transactions and various types of 

secured lending. 

• Exposures of material activities, 

such as securitization, derivatives, 

trading, transaction processing, and 

international activities, to broad 

systemic and adverse financial market 

events. This is most applicable to 

institutions with complex and 

sophisticated liquidity risk profiles. 

13. Policies also should specify the 

nature and frequency of management 

reporting. In normal business 

environments, senior managers should 

receive liquidity risk reports at least 

monthly, while the board of directors 

should receive liquidity risk reports at 

least quarterly. Depending upon the 

complexity of the institution’s business 

mix and liquidity risk profile, 

management reporting may need to be 

more frequent. Regardless of an 

institution’s complexity, it should have 

the ability to increase the frequency of 

reporting on short notice if the need 

arises. Liquidity risk reports should 

impart to senior management and the 

board a clear understanding of the 

institution’s liquidity risk exposure, 

compliance with risk limits, consistency 

between management’s strategies and 

tactics, and consistency between these 

strategies and the board’s expressed risk 

tolerance. 

14. Institutions should consider 

liquidity costs, benefits, and risks in 

strategic planning and budgeting 

processes. Significant business activities 

should be evaluated for both liquidity 

risk exposure and profitability. More 

complex and sophisticated institutions 

should incorporate liquidity costs, 

benefits, and risks in the internal 

product pricing, performance 

measurement, and new product 

approval process for all material 

business lines, products and activities. 

Incorporating the cost of liquidity into 

these functions should align the risktaking incentives of individual business 

lines with the liquidity risk exposure 

their activities create for the institution 

as a whole. The quantification and 

attribution of liquidity risks should be 

explicit and transparent at the line 

management level and should include 

consideration of how liquidity would be 

affected under stressed conditions. 

Liquidity Risk Measurement, Monitoring 

and Reporting 

15. The process of measuring liquidity 

risk should include robust methods for 

comprehensively projecting cash flows 

arising from assets, liabilities, and offbalance-sheet items over an appropriate 

set of time horizons. Pro forma cash 

flow statements are a critical tool for 

adequately managing liquidity risk. 

Cash flow projections can range from 

simple spreadsheets to very detailed 

reports depending upon the complexity 

and sophistication of the institution and 

its liquidity risk profile under 

alternative scenarios. Given the critical 

importance that assumptions play in 

constructing measures of liquidity risk 

and projections of cash flows, 

institutions should ensure that the 

assumptions used are reasonable, 

appropriate, and adequately 

documented. Institutions should 

periodically review and formally 

approve these assumptions. Institutions 

should focus particular attention on the 

assumptions used in assessing the 

liquidity risk of complex assets, 

liabilities, and off-balance-sheet 

positions. Assumptions applied to 

positions with uncertain cash flows, 

including the stability of retail and 

brokered deposits and secondary market 

issuances and borrowings, are especially 

important when they are used to 

evaluate the availability of alternative 

sources of funds under adverse 

contingent liquidity scenarios. Such 

scenarios include, but are not limited to 

deterioration in the institution’s asset 

quality or capital adequacy. 

16. Institutions should ensure that 

assets are properly valued according to 

relevant financial reporting and 

supervisory standards. An institution 

should fully factor into its risk 

management the consideration that 

valuations may deteriorate under market 

stress and take this into account in 

assessing the feasibility and impact of 

asset sales on its liquidity position 

during stress events. 

17. Institutions should ensure that 

their vulnerabilities to changing 

liquidity needs and liquidity capacities 

are appropriately assessed within 

meaningful time horizons, including 

intraday, day-to-day, short-term weekly 

and monthly horizons, medium-term 

horizons of up to one year, and longerterm liquidity needs over one year. 

These assessments should include 

vulnerabilities to events, activities, and 

strategies that can significantly strain 

the capability to generate internal cash. 

Stress Testing 

18. Institutions should conduct stress 

tests on a regular basis for a variety of 

institution-specific and market-wide 

events across multiple time horizons. 

The magnitude and frequency of stress 

testing should be commensurate with 

the complexity of the financial 

institution and the level of its risk 

exposures. Stress test outcomes should 

be used to identify and quantify sources 

of potential liquidity strain and to 

analyze possible impacts on the 

institution’s cash flows, liquidity 

position, profitability, and solvency. 

Stress tests should also be used to 

ensure that current exposures are 

consistent with the financial 

institution’s established liquidity risk 

tolerance. Management’s active 

involvement and support is critical to 

the effectiveness of the stress testing 

process. Management should discuss 

the results of stress tests and take 

remedial or mitigating actions to limit 

the institution’s exposures, build up a 

liquidity cushion, and adjust its 

liquidity profile to fit its risk tolerance. 

The results of stress tests should also 

play a key role in shaping the 

institution’s contingency planning. As 

such, stress testing and contingency 

planning are closely intertwined. 

Collateral Position Management 

19. An institution should have the 

ability to calculate all of its collateral 

positions in a timely manner, including 

assets currently pledged relative to the 

amount of security required and 

unencumbered assets available to be 

pledged. An institution’s level of 

available collateral should be monitored 

by legal entity, by jurisdiction and by 

currency exposure, and systems should 

be capable of monitoring shifts between 

intraday and overnight or term collateral 

usage. An institution should be aware of 

the operational and timing requirements 

associated with accessing the collateral 

given its physical location (i.e., the 

custodian institution or securities 

settlement system with which the 

collateral is held). Institutions should 

also fully understand the potential 

demand on required and available 

collateral arising from various types of 

contractual contingencies during 

periods of both market-wide and 

institution-specific stress. 

Management Reporting 

20. Liquidity risk reports should 

provide aggregate information with 

sufficient supporting detail to enable 

management to assess the sensitivity of 

the institution to changes in market 

conditions, its own financial 

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Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 32041 

7Federally-insured credit unions can borrow 

funds (which includes issuing debt) as given in 

Section 106 of the Federal Credit Union Act 

(FCUA). Section 106 of the FCUA as well as § 741.2 

of the NCUA Rules and Regulations establish 

specific limitations on the amount which can be 

borrowed. Federal Credit Unions can borrow from 

natural persons in accordance with the 

requirements of Part 701.38 of the NCUA Rules and 

Regulations. 

performance, and other important risk 

factors. The types of reports or 

information and their timing will vary 

according to the complexity of the 

institution’s operations and risk profile. 

Reportable items may include but are 

not limited to cash flow gaps, cash flow 

projections, asset and funding 

concentrations, critical assumptions 

used in cash flow projections, key early 

warning or risk indicators, funding 

availability, status of contingent funding 

sources, or collateral usage. Institutions 

should also report on the use of and 

availability of government support, such 

as lending and guarantee programs, and 

implications on liquidity positions, 

particularly since these programs are 

generally temporary or reserved as a 

source for contingent funding. 

Liquidity Across Legal Entities, and 

Business Lines 

21. An institution should actively 

monitor and control liquidity risk 

exposures and funding needs within 

and across legal entities and business 

lines, taking into account legal, 

regulatory, and operational limitations 

to the transferability of liquidity. 

Separately regulated entities will need 

to maintain liquidity commensurate 

with their own risk profiles on a standalone basis. 

22. Regardless of its organizational 

structure, it is important that an 

institution actively monitor and control 

liquidity risks at the level of individual 

legal entities, and the group as a whole, 

incorporating processes that aggregate 

data across multiple systems in order to 

develop a group-wide view of liquidity 

risk exposures and identify constraints 

on the transfer of liquidity within the 

group. 

23. Assumptions regarding the 

transferability of funds and collateral 

should be described in liquidity risk 

management plans. 

Intraday Liquidity Position Management 

24. Intraday liquidity monitoring is an 

important component of the liquidity 

risk management process for institutions 

engaged in significant payment, 

settlement and clearing activities. An 

institution’s failure to manage intraday 

liquidity effectively, under normal and 

stressed conditions, could leave it 

unable to meet payment and settlement 

obligations in a timely manner, 

adversely affecting its own liquidity 

position and that of its counterparties. 

Among large, complex organizations, 

the interdependencies that exist among 

payment systems and the inability to 

meet certain critical payments has the 

potential to lead to systemic disruptions 

that can prevent the smooth functioning 

of all payment systems and money 

markets. Therefore, institutions with 

material payment, settlement and 

clearing activities should actively 

manage their intraday liquidity 

positions and risks to meet payment and 

settlement obligations on a timely basis 

under both normal and stressed 

conditions. Senior management should 

develop and adopt an intraday liquidity 

strategy that allows the institution to: 

• Monitor and measure expected 

daily gross liquidity inflows and 

outflows. 

• Manage and mobilize collateral 

when necessary to obtain intraday 

credit. 

• Identify and prioritize time-specific 

and other critical obligations in order to 

meet them when expected. 

• Settle other less critical obligations 

as soon as possible. 

• Control credit to customers when 

necessary. 

• Ensure that liquidity planners 

understand the amounts of collateral 

and liquidity needed to perform 

payment system obligations when 

assessing the organization’s overall 

liquidity needs. 

Diversified Funding 

25. An institution should establish a 

funding strategy that provides effective 

diversification in the sources and tenor 

of funding. It should maintain an 

ongoing presence in its chosen funding 

markets and strong relationships with 

funds providers to promote effective 

diversification of funding sources. An 

institution should regularly gauge its 

capacity to raise funds quickly from 

each source. It should identify the main 

factors that affect its ability to raise 

funds and monitor those factors closely 

to ensure that estimates of fund raising 

capacity remain valid. 

26. An institution should diversify 

available funding sources in the 

short-, medium- and long-term. 

Diversification targets should be part of 

the medium- to long-term funding plans 

and should be aligned with the 

budgeting and business planning 

process. Funding plans should take into 

account correlations between sources of 

funds and market conditions. Funding 

should also be diversified across a full 

range of retail as well as secured and 

unsecured wholesale sources of funds, 

consistent with the institution’s 

sophistication and complexity. 

Management should also consider the 

funding implications of any government 

programs or guarantees it utilizes. As 

with wholesale funding, the potential 

unavailability of government programs 

over the intermediate- and long-term 

should be fully considered in the 

development of liquidity risk 

management strategies, tactics, and risk 

tolerances. Funding diversification 

should be implemented using limits 

addressing counterparties, secured 

versus unsecured market funding, 

instrument type, securitization vehicle, 

and geographic market. In general, 

funding concentrations should be 

avoided. Undue over-reliance on any 

one source of funding is considered an 

unsafe and unsound practice. 

27. An essential component of 

ensuring funding diversity is 

maintaining market access. Market 

access is critical for effective liquidity 

risk management, as it affects both the 

ability to raise new funds and to 

liquidate assets. Senior management 

should ensure that market access is 

being actively managed, monitored, and 

tested by the appropriate staff. Such 

efforts should be consistent with the 

institution’s liquidity risk profile and 

sources of funding. For example, access 

to the capital markets is an important 

consideration for most large complex 

institutions, whereas the availability of 

correspondent lines of credit and other 

sources of whole funds are critical for 

smaller, less complex institutions. 

28. An institution needs to identify 

alternative sources of funding that 

strengthen its capacity to withstand a 

variety of severe institution-specific and 

market-wide liquidity shocks. 

Depending upon the nature, severity, 

and duration of the liquidity shock, 

potential sources of funding include, 

but are not limited to, the following: 

• Deposit growth. 

• Lengthening maturities of 

liabilities. 

• Issuance of debt instruments.7

• Sale of subsidiaries or lines of 

business. 

• Asset securitization. 

• Sale (either outright or through 

repurchase agreements) or pledging of 

liquid assets. 

• Drawing-down committed facilities. 

• Borrowing. 

Cushion of Liquid Assets 

29. Liquid assets are an important 

source of both primary (operating 

liquidity) and secondary (contingent 

liquidity) funding at many institutions. 

Indeed, a critical component of an 

institution’s ability to effectively 

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32042 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 

8Financial institutions that have had their 

liquidity supported by temporary government 

programs administered by the Department of the 

Treasury, Federal Reserve and/or FDIC should not 

base their liquidity strategies on the belief that such 

programs will remain in place indefinitely. 

9See 12 U.S.C. 1831o; 12 CFR Part 6 (OCC), 12 

CFR Part 208, 12 CFR Part 308 (FDIC), and 12 CFR 

Part 565 (OTS) and 12 U.S.C. 1790d; 12 CFR Part 

702 (NCUA). 

10Section 38 of the FDI Act (12 U.S.C. 1831o) 

requires insured depository institutions that are not 

well capitalized to receive approval prior to 

engaging in certain activities. Section 38 restricts or 

prohibits certain activities and requires an insured 

depository institution to submit a capital restoration 

plan when it becomes undercapitalized. Section 

216 of the Federal Credit Union Act and § 702 of 

the NCUA Rules and Regulations establish the 

requirements and restrictions for Federally-insured 

credit unions under Prompt Corrective Action. For 

brokered, nonmember deposits, additional 

restrictions apply to Federal credit unions as given 

in §§ 701.32 and 742 of the NCUA Rules and 

Regulations. 

11There may be time constraints, sometimes 

lasting weeks, encountered in initially establishing 

lines with FRB and/or FHLB. As a result, financial 

institutions should plan to have these lines set up 

well in advance. 

12Federally-insured credit unions are evaluated 

using the ‘‘CAMEL’’ rating system, which is 

substantially similar to the ‘‘CAMELS’’ system 

without the ‘‘S’’ component for rating Sensitivity to 

market risk. Information on NCUA’s rating system 

can be found in Letter to Credit Unions 07–CU–12, 

CAMEL Rating System. 

respond to potential liquidity stress is 

the availability of a cushion of highly 

liquid assets without legal, regulatory, 

or operational impediments (i.e., 

unencumbered) that can be sold or 

pledged to obtain funds in a range of 

stress scenarios. These assets should be 

held as insurance against a range of 

liquidity stress scenarios; including 

those that involve the loss or 

impairment of typically available 

unsecured and/or secured funding 

sources. The size of the cushion of such 

high-quality liquid assets should be 

supported by estimates of liquidity 

needs performed under an institution’s 

stress testing as well as aligned with the 

risk tolerance and risk profile of the 

institution. Management estimates of 

liquidity needs during periods of stress 

should incorporate both contractual and 

non-contractual cash flows, including 

the possibility of funds being 

withdrawn. Such estimates should also 

assume the inability to obtain unsecured 

funding as well as the loss or 

impairment of access to funds secured 

by assets other than the safest, most 

liquid assets. 

30. Management should ensure that 

unencumbered, highly liquid assets are 

readily available and are not pledged to 

payment systems or clearing houses. 

The quality of unencumbered liquid 

assets is important as it will ensure 

accessibility during the time of most 

need. For example, an institution could 

utilize its holdings of high-quality U.S. 

Treasury securities, or similar 

instruments, and enter into repurchase 

agreements in response to the most 

severe stress scenarios. 

Contingency Funding Plan 8

31. All financial institutions, 

regardless of size and complexity, 

should have a formal CFP that clearly 

sets out the strategies for addressing 

liquidity shortfalls in emergency 

situations. A CFP should delineate 

policies to manage a range of stress 

environments, establish clear lines of 

responsibility, and articulate clear 

implementation and escalation 

procedures. It should be regularly tested 

and updated to ensure that it is 

operationally sound. 

32. Contingent liquidity events are 

unexpected situations or business 

conditions that may increase liquidity 

risk. The events may be institutionspecific or arise from external factors 

and may include: 

• The institution’s inability to fund 

asset growth. 

• The institution’s inability to renew 

or replace maturing funding liabilities. 

• Customers unexpectedly exercising 

options to withdraw deposits or exercise 

off-balance-sheet commitments. 

• Changes in market value and price 

volatility of various asset types. 

• Changes in economic conditions, 

market perception, or dislocations in the 

financial markets. 

• Disturbances in payment and 

settlement systems due to operational or 

local disasters. 

33. Insured institutions should be 

prepared for the specific contingencies 

that will be applicable to them if they 

become less than Well Capitalized 

pursuant to Prompt Correction Action.9

Contingencies may include restricted 

rates paid for deposits, the need to seek 

approval from the FDIC/NCUA to accept 

brokered deposits, or the inability to 

accept any brokered deposits.10

34. A CFP provides a documented 

framework for managing unexpected 

liquidity situations. The objective of the 

CFP is to ensure that the institution’s 

sources of liquidity are sufficient to 

fund normal operating requirements 

under contingent events. A CFP also 

identifies alternative contingent 

liquidity resources 11 that can be 

employed under adverse liquidity 

circumstances. An institution’s CFP 

should be commensurate with its 

complexity, risk profile, and scope of 

operations. 

35. Contingent liquidity events can 

range from high-probability/low-impact 

events to low-probability/high-impact 

events. Institutions should incorporate 

planning for high-probability/lowimpact liquidity risks into the day-today management of sources and uses of 

funds. Institutions can generally 

accomplish this by assessing possible 

variations around expected cash flow 

projections and providing for adequate 

liquidity reserves and other means of 

raising funds in the normal course of 

business. In contrast, all financial 

institution CFPs will typically focus on 

events that, while relatively infrequent, 

could significantly impact the 

institution’s operations. A CFP should: 

• Identify Stress Events. Stress events 

are those that may have a significant 

impact on the institution’s liquidity 

given its specific balance-sheet 

structure, business lines, organizational 

structure, and other characteristics. 

Possible stress events may include 

deterioration in asset quality, changes in 

agency credit ratings, Prompt Corrective 

Action (PCA) and CAMELS 12 ratings 

downgrades, widening of credit default 

spreads, operating losses, declining 

financial institution equity prices, 

negative press coverage, or other events 

that may call into question an 

institution’s ability to meet its 

obligations. 

• Assess Levels of Severity and 

Timing. The CFP should delineate the 

various levels of stress severity that can 

occur during a contingent liquidity 

event and identify the different stages 

for each type of event. The events, 

stages, and severity levels identified 

should include temporary disruptions, 

as well as those that might be more 

intermediate term or longer-term. 

Institutions can use the different stages 

or levels of severity identified to design 

early-warning indicators, assess 

potential funding needs at various 

points in a developing crisis, and 

specify comprehensive action plans. 

• Assess Funding Sources and Needs. 

A critical element of the CFP is the 

quantitative projection and evaluation 

of expected funding needs and funding 

capacity during the stress event. This 

entails an analysis of the potential 

erosion in funding at alternative stages 

or severity levels of the stress event and 

the potential cash flow mismatches that 

may occur during the various stress 

levels. Management should base such 

analysis on realistic assessments of the 

behavior of funds providers during the 

event and incorporate alternative 

contingency funding sources. The 

analysis also should include all material 

on- and off-balance-sheet cash flows and 

their related effects. The result should 

be a realistic analysis of cash inflows, 

outflows, and funds availability at 

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13This includes the standards established in this 

interagency guidance as well as the supporting 

material each agency provides in its examination 

manuals and handbooks directed at their 

supervised institutions. Industry standards include 

those advanced by recognized industry associations 

and groups. 

different time intervals during the 

potential liquidity stress event in order 

to measure the institution’s ability to 

fund operations. Common tools to 

assess funding mismatches include: 

Æ Liquidity gap analysis—A cash flow 

report that essentially represents a base 

case estimate of where funding 

surpluses and shortfalls will occur over 

various future timeframes. 

Æ Stress tests—A pro forma cash flow 

report with the ability to estimate future 

funding surpluses and shortfalls under 

various liquidity stress scenarios and 

the institution’s ability to fund expected 

asset growth projections or sustain an 

orderly liquidation of assets under 

various stress events. 

• Identify Potential Funding Sources. 

Because liquidity pressures may spread 

from one funding source to another 

during a significant liquidity event, 

institutions should identify alternative 

sources of liquidity and ensure ready 

access to contingent funding sources. In 

some cases, these funding sources may 

rarely be used in the normal course of 

business. Therefore, institutions should 

conduct advance planning and periodic 

testing to ensure that contingent funding 

sources are readily available when 

needed. 

• Establish Liquidity Event 

Management Processes. The CFP should 

provide for a reliable crisis management 

team and administrative structure, 

including realistic action plans used to 

execute the various elements of the plan 

for given levels of stress. Frequent 

communication and reporting among 

team members, the board of directors, 

and other affected managers optimize 

the effectiveness of a contingency plan 

during an adverse liquidity event by 

ensuring that business decisions are 

coordinated to minimize further 

disruptions to liquidity. Such events 

may also require the daily computation 

of regular liquidity risk reports and 

supplemental information. The CFP 

should provide for more frequent and 

more detailed reporting as the stress 

situation intensifies. 

• Establish a Monitoring Framework 

for Contingent Events. Institution 

management should monitor for 

potential liquidity stress events by using 

early-warning indicators and event 

triggers. The institution should tailor 

these indicators to its specific liquidity 

risk profile. The early recognition of 

potential events allows the institution to 

position itself into progressive states of 

readiness as the event evolves, while 

providing a framework to report or 

communicate within the institution and 

to outside parties. Early warning signals 

may include but are not limited to 

negative publicity concerning an asset 

class owned by the institution, 

increased potential for deterioration in 

the institution’s financial condition, 

widening debt or credit default swap 

spreads, and increased concerns over 

the funding of off-balance-sheet items. 

36. To mitigate the potential for 

reputation contagion, effective 

communication with counterparties, 

credit-rating agencies, and other 

stakeholders when liquidity problems 

arise is of vital importance. Smaller 

institutions that rarely interact with the 

media should have plans in place for 

how they will manage press inquiries 

that may arise during a liquidity event. 

In addition, group-wide contingency 

funding plans, liquidity cushions, and 

multiple sources of funding are 

mechanisms that may mitigate 

reputation concerns. 

37. In addition to early warning 

indicators, institutions that issue public 

debt, utilize warehouse financing, 

securitize assets, or engage in material 

over-the-counter derivative transactions 

typically have exposure to event triggers 

embedded in the legal documentation 

governing these transactions. 

Institutions that rely upon brokered 

deposits should also incorporate PCArelated downgrade triggers into their 

CFPs since a change in PCA status could 

have a material bearing on the 

availability of this funding source. 

Contingent event triggers should be an 

integral part of the liquidity risk 

monitoring system. Institutions that 

originate loans for asset securitization 

programs pose heightened liquidity 

concerns due to the unexpected funding 

needs associated with an early 

amortization event or disruption of 

funding pipelines. Institutions that 

securitize assets should have liquidity 

contingency plans that address this 

potential unexpected funding 

requirement. 

38. Institutions that rely upon secured 

funding sources also are subject to 

potentially higher margin or collateral 

requirements that may be triggered upon 

the deterioration of a specific portfolio 

of exposures or the overall financial 

condition of the institution. The ability 

of a financially stressed institution to 

meet calls for additional collateral 

should be considered in the CFP. 

Potential collateral values also should 

be subject to stress tests since 

devaluations or market uncertainty 

could reduce the amount of contingent 

funding that can be obtained from 

pledging a given asset. Additionally, 

triggering events should be understood 

and monitored by liquidity managers. 

39. Institutions should test various 

elements of the CFP to assess their 

reliability under times of stress. 

Institutions that rarely use the type of 

funds they identify as standby sources 

of liquidity in a stress situation, such as 

the sale or securitization of loans, 

securities repurchase agreements, 

Federal Reserve discount window 

borrowing, or other sources of funds, 

should periodically test the operational 

elements of these sources to ensure that 

they work as anticipated. However, 

institutions should be aware that during 

real stress events, prior market access 

testing does not guarantee that these 

funding sources will remain available 

within the same timeframes and/or on 

the same terms. 

40. Larger, more complex institutions 

can benefit by employing operational 

simulations to test communications, 

coordination, and decision-making 

involving managers with different 

responsibilities, in different geographic 

locations, or at different operating 

subsidiaries. Simulations or tests run 

late in the day can highlight specific 

problems such as difficulty in selling 

assets or borrowing new funds at a time 

when business in the capital markets 

may be less active. 

Internal Controls 

41. An institution’s internal controls 

consist of procedures, approval 

processes, reconciliations, reviews, and 

other mechanisms designed to provide 

assurance that the institution manages 

liquidity risk consistent with boardapproved policy. Appropriate internal 

controls should address relevant 

elements of the risk management 

process, including adherence to policies 

and procedures, the adequacy of risk 

identification, risk measurement, 

reporting, and compliance with 

applicable rules and regulations. 

42. Management should ensure that 

an independent party regularly reviews 

and evaluates the various components 

of the institution’s liquidity risk 

management process. These reviews 

should assess the extent to which the 

institution’s liquidity risk management 

complies with both supervisory 

guidance and industry sound practices 

taking into account the level of 

sophistication and complexity of the 

institution’s liquidity risk profile.13

Smaller, less-complex institutions may 

achieve independence by assigning this 

responsibility to the audit function or 

other qualified individuals independent 

of the risk management process. The 

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32044 Federal Register / Vol. 74, No. 127 / Monday, July 6, 2009 / Notices 

independent review process should 

report key issues requiring attention 

including instances of noncompliance 

to the appropriate level of management 

for prompt corrective action consistent 

with approved policy. 

Holding Company—Liquidity Risk 

Management 

43. Financial holding companies, 

bank holding companies, and savings 

and loan holding companies 

(collectively, ‘‘holding companies’’) 

should develop and maintain liquidity 

management processes and funding 

programs that are consistent with their 

complexity, risk profile, and scope of 

operations. Appropriate liquidity risk 

management is especially important for 

holding companies since liquidity 

difficulties can easily spread to 

subsidiary institutions, particularly in 

similarly named companies where 

customers do not always understand the 

legal distinctions between the holding 

company and the institution. For this 

reason, financial institutions must 

ensure that liquidity is adequate at all 

levels of the organization to fully 

accommodate funding needs in periods 

of stress. This includes legal entities on 

a stand-alone basis as well as for the 

consolidated institution. 

44. Liquidity risk management 

processes and funding programs should 

take into full account the institution’s 

lending, investment and other activities 

and should ensure that adequate 

liquidity is maintained at the parent 

holding company and each of its 

subsidiaries. These processes and 

programs should fully incorporate real 

and potential constraints on the transfer 

of funds among subsidiaries and 

between subsidiaries and the parent 

holding company, including legal and 

regulatory restrictions. Holding 

company liquidity should be 

maintained at levels sufficient to fund 

holding company and affiliate 

operations for an extended period of 

time in a stress environment, where 

access to normal funding sources are 

disrupted, without having a negative 

impact on insured depository institution 

subsidiaries. 

45. More in-depth discussions of the 

specific considerations surrounding the 

principles of safe and sound liquidity 

risk management of holding companies, 

as well as legal and regulatory 

restrictions regarding the flow of funds 

between holding companies and their 

subsidiaries are contained in the Federal 

Reserve’s Trading and Capital Markets 

Activities Manual and Bank Holding 

Company Supervision Manual and the 

Office of Thrift Supervision’s Holding 

Companies Handbook. 

Dated: June 16, 2009. 

John C. Dugan, 

Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, June 29, 2009. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated at Washington, DC, the 23rd day of 

June, 2009. 

By order of the Federal Deposit Insurance 

Corporation. 

Valerie J. Best, 

Assistant Executive Secretary. 

Dated: June 10, 2009. 

By the Office of Thrift Supervision. 

John E. Bowman, 

Acting Director. 

Dated: February 11, 2009. 

By the National Credit Union 

Administration Board. 

Mary F. Rupp, 

Secretary of the Board. 

[FR Doc. E9–15800 Filed 7–2–09; 8:45 am] 

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; 

6720–01–P; 7535–01–P 

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