Bank Analysis School - Case Study & Resources

Liquidity Defined The ability to meet cash needs (expected and unexpected) at a reasonable cost.

Importance of Liquidity An inability to meet cash needs leads to failure. Lack of liquidity is the fastest path to bank failure!

Key Analysis Factors

Reliance on Potentially Unstable Funding

Level of Liquid Assets

Liquidity Analysis

Risk Management Practices (CFP, cash flow projections and stress-testing, etc.)

Access to External Funding (overall condition of the bank impacts creditworthiness)

Pay Attention to These 4 High-Risk Liquidity Characteristics! 1. Heavy reliance on potentially unstable funding

• Includes: borrowings, brokered deposits, listing service deposits, uninsured deposits. • Risk: These funding sources may disappear during financial stress. 2. Deteriorating/weak overall financial condition • Indicators: poor asset quality, weak earnings, low/declining capital. • Impact: Reduces the bank’s creditworthiness and access to external funding. 3. Limited amount of liquid assets • Liquid assets include: cash, interest-bearing bank balances, Federal Funds Sold, unpledged and marketable securities. • Why it matters: liquid assets are the final line of defense in a liquidity crisis when borrowing availability is limited or restricted. 4. Weak risk management practices • Indicators: inadequate Contingency Funding Plan (CFP), lack of realistic cash flow projections and stress testing, overall poor governance and monitoring systems for the bank’s size, complexity, and risk profile. • Risk: Management might fail to effectively anticipate or respond to liquidity stress. Regulatory Guidance:  FIL-13-2010: Funding and Liquidity Risk Management  FIL-39-2023: Addendum to the Interagency Policy Statement on Funding and Liquidity Risk Management - Importance of Contingency Funding Plans  FIL-113-2020: Combined Final Rule on Brokered Deposits and Interest Rate Restrictions