Capital Markets Examiner School, Providence, RI

Liquidity Stress Testing – Assumptions

 Does their assumption building have time dimensions as a consideration:  More assets can be sold over longer time periods.  Are there significant levels of those assets that will need time?  Liquidity facilities allow the bank to buy time to sell less liquid assets.  When does the clock run out?

 Community banks lack the funding diversity and “too big to fail” access that larger competitors may have.

Liquidity Stress Testing – Assumptions & Scenarios

 What level of assumption and scenario development is focused on deposit decay and disintermediation risks?  Are stress events solely deterministic or does the bank have the insight and ability for a stochastic approach?  This could be a stretch for most community banks.  Do loan repayment cash flows and the marketability of the investment portfolio reasonably reflect the assumed economic environment in a systemic stress?  As yield curves shift, is funding disintermediation understood and accounted for as deposits move from short to long (or vice-versa)?