Capital Markets Examiner School, Providence, RI

Liquidity Stress Testing – Assumptions

 Does the bank clearly differentiate and calculate LSTs as long-term events (e.g. 12 months) and not a daily or shorter-term (e.g. overnight) liquidity exercise?  How well do they assume they can manage depositor and investor/public confidence issues in a stress event?  Beware of overly optimistic banks in the CFP.

Liquidity Stress Testing – Assumptions

 How well do they delineate their major balance sheet components?  Cash flows – review uncertainty of CFs and maintaining awareness of ongoing business variations/risks such as regulatory rulings, judgements etc.  Balance sheet  Assets – valuation risks – (see stress modifier #5 above)  Funding – CP or MTNs not common at community banks  Off-balance sheet – fees, cash payments from credit facilities can slow – (see stress modifier # 7 above)  At what point do the bank’s borrowing sources become curtailed or closed?