Capital Markets Examiner School, Providence, RI

Liquidity Stress Testing – Assumptions & Scenarios

 Are unfunded lending commitments accurately reflected?  How is public confidence in the bank reflected in bank liabilities?  Are there differing perspectives depending upon liability type from deposits to CDs to marketable debt issuances?  Does the bank display any unrealistic assumptions about funding available under these scenarios?  Is there any relation between liquidity stress modeling and sensitivity modeling particularly for high-impact segments such as NMDs, loan repayments and unfunded commitments?  Is the bank realistic for borrowing facilities?  Will potentially needed collateral be available?  Does the bank display any high level of reliance on borrowing facilities that must be accounted for?

Liquidity Stress Testing - Output

 Are qualitative adjustments clearly shown vs. quantitative approaches?  How are management adjustments reviewed and scrutinized?  It should be systematic for consistency in approach.  Are results clearly and routinely reported?  Are the results taken seriously by senior management and the board?  Have any actions ever been taken in reaction to LST results?  Is there any indication of challenge to the process?  Does the bank regard this as a regulatory check-box exercise or is it clearly embedded as a useful risk management tool?  Is there any independent validation of the process and results?  How do policy limits compare to stress scenarios? Is there any linkage?  Do the results make sense relative to how the balance sheet is structured?