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:
- Rapid asset growth funded by potentially volatile liabilities.
- Real or perceived negative publicity.
- A decline in asset quality.
- A decline in earnings performance or projections.
- Downgrades or announcements of potential downgrades of the institution's credit rating by rating agencies.
- Cancellation of loan commitments and/or not renewing maturing loans.
- Wider secondary spreads on the bank's senior and subordinated debt, and increasing trading of the institution's debt.
- Counterparties increase collateral requirements or demand collateral for accepting credit exposure to the institution.
- Correspondent banks decrease or eliminate credit line availability.
- Counterparties and brokers are unwilling to deal in unsecured or longer-term transactions.
Indicators that the institution potentially may have a serious liquidity problem include the following:
- Volume of turndowns in the brokered markets is unusually large, forcing the institution to deal directly with fewer willing counterparties.
- Rating sensitive providers, such as money managers and public entities, abandon the bank.
- The institution receives requests from depositors for early withdrawal of their funds, or the bank has to repurchase its paper in the market.
- Transaction sizes are decreasing, and some counterparties are even unwilling to enter into short-dated transactions.
An increasing spread paid on deposits relative to local competitors, or national or regional composites.