Liquidity

Each institution's liquidity policy should have a contingency plan that addresses alternative funding if initial projections of funding sources and uses are incorrect or if a liquidity crisis arises, such as when an institution is having trouble meeting its cash letter. A liquidity contingency plan helps ensure that a bank or consolidated company can prudently and efficiently manage routine and extraordinary fluctuations in liquidity.

Management should monitor various internal as well as market indicators of liquidity problems at the institution. Indicators serve as early warning signals of a potential problem or as later stage indicators that the institution has a serious liquidity problem. The early warning indicators, while not necessarily requiring drastic corrective measures, may prompt management and the board to do additional monitoring. Examples of these indicators include the following:

A necessary prerequisite to sound funds management decisions is a sound management information system. Reports containing certain basic information should be readily available for day-to-day liquidity and funds management and during times of stress. Report formats and their contents will vary from bank to bank depending on the characteristics of the bank and its funds management methods and practices. Normally a sound management information system will contain reports detailing the following:

To balance profitability and liquidity, management must carefully weigh the full return on liquid assets (yield plus insurance value) against the expected higher return associated with less liquid assets. Income derived from higher yielding assets may be offset if a forced sale is necessary due to adverse balance sheet fluctuations.

https://www.fdic.gov/regulations/safety/manual/section6-1.html#management

Each institution's liquidity policy should have a contingency plan that addresses alternative funding if initial projections of funding sources and uses are incorrect or if a liquidity crisis arises, such as when an institution is having trouble meeting its cash letter. A liquidity contingency plan helps ensure that a bank or consolidated company can prudently and efficiently manage routine and extraordinary fluctuations in liquidity.

Liquidity represents the ability to fund assets and meet obligations as they become due. Liquidity is essential in all banks to compensate for expected and unexpected balance sheet fluctuations and provide funds for growth. Liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is among the most important activities that a bank conducts.