There are three categories of liquidity sources that apply to liquidity planning. Each of these sources is relevant to the underlying safety and soundness of a credit union’s liquidity management program. Essentially, these sources act as layers of liquidity protection and function similar to a series of financial firewalls. The three categories are:

The NCUA Board adopted a final rule on liquidity and contingency funding plans on October 24, 2013.  NCUA adopted this rule to ensure all credit unions conduct sound liquidity planning, and large credit unions establish access to at least one federal source of contingent liquidity: the Federal Reserve Discount Window (Discount Window) and/or Central Liquidity Facility (CLF).  As we learned during the financial crisis, sound liquidity planning and access to federal liquidity sources are vital to the safety and soundness of the credit union system.

Other risks factor into Liquidity Risk and must be taken into account

Submitted by sevans on Tue, 02/10/2015 - 3:39pm

Bankers and examiners must understand and assess how a bank’s exposure to other risks may affect its liquidity. The OCC defines and assesses eight categories of risk. In addition to liquidity, these risk types include credit, interest rate, price, operational, compliance, strategic, and reputation. These categories are not mutually exclusive—any product or service may expose a bank to multiple risks—and a real or perceived problem in any area can erode a bank’s liquidity position or affect its funding costs, thereby increasing its liquidity risk.

An institution may choose the appropriate FAS 114 measurement method on a loan-by-loan basis for an individually impaired loan, except for an impaired collateral-dependent loan. The agencies require impairment of a collateral-dependent loan to be measured using the fair value of collateral method. As defined in FAS 114, a loan is collateral dependent if repayment of the loan is expected to be provided solely by the underlying collateral.