Submitted by sevans on Tue, 02/10/2015 - 3:42pm

Effective management and control of the liquidity risk stemming from funding gaps depends heavily on the use of operational cash flow projections and the reasonableness and accuracy of the assumptions that are applied. Institution-specific factors that affect the development of cash flow assumptions include the following:

  • Deteriorating asset quality
  • Highly volatile or unpredictable asset amortization (prepayments), nonmaturity deposits, off-balance-sheet commitments (lines or letters of credit), and other estimated cash flows
  • Unexpected fluctuations in loan demand or deposit balances
  • Unanticipated new business due to poor internal management information systems (MIS) reporting and communication
  • The inability of permanent takeout lenders to perform as expected.
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