Bank Analysis School eBook

Liquidity Analysis

On-Balance Sheet Liquidity

Reliance on Wholesale Funding

Risk Management Practices

Capital Cushion

Asset Quality

Liquidity Rating

In evaluating the adequacy of a liquidity position, consideration should be given to the current level and prospective sources of liquidity compared to funding needs, as well as the adequacy of funds management practices relative to the institution’s risk profile. Funds management practices should ensure that an institution is able to maintain a level of liquidity sufficient to meet its financial obligations in a timely manner and the banking needs of its community. Practices should reflect the ability to manage unplanned changes in funding sources and react to changes in market conditions that affect the ability to quickly liquidate assets with minimal loss. Funds management should ensure liquidity is not maintained at a high cost or reliance on funding source not available in financial stress or adverse market conditions. Assessment of a liquidity position would include the following: Adequacy of liquidity sources compared to current and future needs ◊ Ability to meet funding needs without adverse effect on operations ◊ Availability to readily convert asset to cash ◊ Access to markets and other funding sources ◊ Diversification of funding sources ◊ Degree of reliance on short-term, volatile sources of funds to fund long-term assets ◊ Trend and stability of deposits ◊ Ability to securitize and sell certain pools of assets ◊ Management’s ability to identify, measure, monitor, and control liquidity position ◊ Effectiveness of funds management strategies, policies, information systems, and contingency funding plans

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• Liquidity levels are deficient • Inadequate funds management practices •May not have ability to obtain sufficient volume of funds on reasonable terms to meet liquidityneeds

• Critically deficient levels of liquidityor funds management practices • Continued viability of the institution is threatened • Immediate external financial assistance to meet maturing obligations or operational liquidity is required

• Satisfactory liquidity position • Fundsmanagement practices are adequate • Funding sources are sufficient and on acceptable terms •Modest weaknesses in fundmanagement practices

• Levels of liquidityare in need of improvement •May lack ready access to funding sources on reasonable terms • Evidence of significant weaknesses in funds management practices

• Strong liquidity levels •Well-developed funds management practices • Reliable access to sufficient funding sources with favorable terms • Ability to meet present and anticipated liquidity needs