Large Bank Supervision Forum eBook
Internal Use Only
Large Bank Supervision Forum
March 4-6, 2024 Baltimore, MD
@ www.csbs.org ♦ @csbsnews
CONFERENCE OF STATE BANK SUPERVISORS 1300 I Street NW / Suite 700 / Washington, DC 20005 / (202) 296-2840
Large Bank Supervision Forum March 4 - 6, 2024 | All Times Eastern Time Baltimore, Maryland
Location: Hyatt Regency Baltimore Meeting Room: Constellation EF
Monday, March 4 12:00 PM – 1:00 PM
Registration I Outside Constellation EF
Welcome & Opening Remarks Amy Richardson Senior Director, Workforce Development Conference of State Bank Supervisors Welcome to Maryland Antonio Salazar Commissioner Maryland Office of Financial Regulation Keynote Mo Romani Deputy CRO & Chief Credit Officer Truist Bank
1:00 PM – 1:15 PM
1:15 PM – 1:30 PM
1:30 PM – 2:15 PM
Break
2:15 PM – 2:30 PM
A Tale of Economic Metrics: Understanding Current and Potential Future Economic Conditions Tom Siems Chief Economist Conference of State Bank Supervisors
2:30 PM – 3:30 PM
Break
3:30 PM – 3:45 PM
A Dialogue with CSBS Leadership Lise Kruse Commissioner North Dakota Department of Financial Institutions
3:45 PM – 4:30 PM
Brandon Milhorn President & CEO Conference of State Bank Supervisors
Networking Reception I Columbia/Frederick
5:30 PM – 7:30 PM Tuesday, March 5 7:30 AM – 8:30 AM
Breakfast I Columbia/Frederick
Beyond (Lagging) Financial Metrics A CAMELS examination approach that starts with Corporate Governance Scott Polakoff Director Royal Business Bank
8:30 AM – 10:00 AM
Break
10:00 AM – 10:15 AM
Enterprise Risk Management (ERM) Discussion Jacob Gardner Senior Examination Specialist, Large Financial Institutions Federal Deposit Insurance Corporation (FDIC)
10:15 AM – 11:30 AM
Lorenzo Garza Vice President, Banking Supervision Federal Reserve Bank of Dallas John Hays Senior Director, Supervisory Process Conference of State Bank Supervisors Data Analytics Carlos Cordova Data Scientist Conference of State Bank Supervisors Brennan Zubrick Vice President, Research & Analytics Conference of State Bank Supervisors Lunch on Own
11:30 AM – 1:00 PM
1:00 PM – 2:00 PM
Break
2:00 PM – 2:15 PM
Navigating the Current Landscape of CMBS Markets: Trends & Risks Stephen Buschbom Research Director Trepp
2:15 PM – 3:15 PM
Break
3:15 PM – 3:30 PM
Financial Crimes & Cyber Threats Keith Custer Supervisory Special Agent Federal Bureau of Investigation (FBI) Steve Spillman Special Agent Federal Bureau of Investigation (FBI)
3:30 PM – 4:30 PM
Wednesday, March 6 7:30 AM – 8:30 AM
Breakfast I Columbia/Frederick
Federal Agency Panel Chris Rivera
8:30 AM – 10:00 AM
Section Chief, Risk Management Supervision Federal Deposit Insurance Corporation (FDIC)
Jason Schemmel Assistant Vice President, Supervision, Regulation & Credit Federal Reserve Bank of Richmond
Mary Beth Quist Senior Vice President, Bank Supervision Conference of State Bank Supervisors
Break
10:00 AM – 10:15 AM
Fireside Chat: Recap of SVB Failure Aaron Prosperi Deputy Commissioner of Banking California Department of Financial Protection & Innovation
10:15 AM – 11:30 AM
Mary Beth Quist Senior Vice President, Bank Supervision Conference of State Bank Supervisors
Lunch on Own
11:00 AM – 1:30 PM
Lessons Learned from March 2023 Varanessa Marshall Assistant Director, Monitoring & Risk Analysis Federal Deposit Insurance Corporation (FDIC)
1:00 PM – 2:00 PM
Large Bank Supervision: State of the State and Best Practices Mary Beth Quist
2:00 PM – 2:45 PM
Senior Vice President, Bank Supervision Conference of State Bank Supervisors
Break
2:45 PM – 3:00 PM
What’s Happening in DC Will Dargusch Senior Director, Legislative Policy Conference of State Bank Supervisors
3:00 PM – 3:30 PM
CSBS Accreditation, Certification & Training Updates Melissa Sneed Deputy Commissioner for Supervision Georgia Department of Banking & Finance Sebastien Monnet Acting Senior Vice President, Workforce Development Conference of State Bank Supervisors
3:30 PM – 4:15 PM
Closing Remarks Amy Richardson
4:15 PM – 4:30 PM
Senior Director, Workforce Development Conference of State Bank Supervisors
Adjourn
4:30 PM
CSBS Large Bank Supervision Forum Baltimore, Maryland March 4 ‐ 6, 2024
ATTENDEES Alabama State Banking Department Bonds, Alison
alison.bonds@banking.alabama.gov jonathan.face@banking.alabama.gov curtis.larsen@banking.alabama.gov john.russell@banking.alabama.gov
Face, Jonathan Larsen, Curtis Russell, John
Arkansas State Bank Department Bush, Gary
gbush@banking.state.ar.us chamilton@banking.state.ar.us jhouseholder@banking.state.ar.us bmoseley@banking.state.ar.us
Hamilton, Caleb Householder, John Moseley, Baker
California Department of Financial Protection and Innovation Levernier, Timothy
timothy.levernier@dfpi.ca.gov mohammad.noor@dfpi.ca.gov
Noor, Mohammad
Florida Office of Financial Regulation Hicks, Susan
susan.hicks@flofr.gov terry.hughes@flofr.gov
Hughes, Terry
Georgia Department of Banking and Finance Bridges, Laura
lbridges@dbf.state.ga.us jmendoza@dbf.state.ga.us msneed@dbf.state.ga.us
Mendoza, Jennifer Sneed, Melissa
Illinois Division of Banking Andreatos, Andreas
andreas.andreatos@illinois.gov oscar.gonzalez@illinois.gov samuel.hendrickson@illinois.gov russell.holman@illinois.gov katherine.reddick@illinois.gov wayne.r.shoemaker@Illinois.gov thomas.stuart@illinois.gov
Gonzalez, Oscar
Hendrickson, Samuel Holman, Russell Reddick, Katherine Shoemaker, Wayne
Stuart, Thomas
Kansas Office of the State Bank Commissioner Baugh, Michael
michael.baugh@osbckansas.org marcella.haskell@osbckansas.org
Haskell, Marcella
Louisiana Office of Financial Institutions Bruce, Jesse
jbruce@ofi.la.gov cfloyd@ofi.la.gov
Floyd, Chris
Maine Bureau of Financial Institutions McLaughlin, Andrea
andrea.mcLaughlin@maine.gov
Massachusetts Division of Banks Beighley, Denise
denise.beighley@Mass.gov martin.jewett@mass.gov
Jewett, Martin
Mississippi Department of Banking & Consumer Finance Burton, Bryan
bryan.burton@dbcf.ms.gov
Cox, Jeff
jeff.cox@dbcf.ms.gov
Hudson, Mark Jones, Reed
mark.hudson@dbcf.ms.gov reed.jones@dbcf.ms.gov cody.king@dbcf.ms.gov paul.lion@dbcf.ms.gov nicky.shelton@dbcf.ms.gov erik.smith@dbcf.ms.gov hannah.thames@dbcf.ms.gov perryanne.thimmes@dbcf.ms.gov
King, Cody Lion, Paul
Shelton, Nicky
Smith, Erik
Thames, Hannah
Thimmes, Perry Anne
Williams, Don
don.williams@dbcf.ms.gov
Nebraska Department of Banking and Finance Focken, Brody
brody.focken@nebraska.gov benjamin.kiolbasa@nebraska.gov
Kiolbasa, Benjamin
New York State Department of Financial Services Alvarez, Nerissa
nerissa.alvarez@dfs.ny.gov marian.chen@dfs.ny.gov reena.mathew@dfs.ny.gov nia.mcleod@dfs.ny.gov matthew.meyer@dfs.ny.gov stuart.taub@dfs.ny.gov
Chen, Marian Mathew, Reena
McLeod, Nia
Meyer, Matthew
Taub, Stuart
North Carolina Office of Commissioner of Banks Dalpiaz, Jay
jdalpiaz@nccob.gov tgatlin@nccob.gov rstewart@nccob.gov
Gatlin, Thomas Stewart, Richard
North Dakota Department of Financial Institutions Kruse, Lise
lkruse@nd.gov amills@nd.gov
Mills Fischer, Angie
Ohio Division of Financial Institutions Morgan, Brian Oregon Division of Financial Regulation Anderson, Kirsten
brian.morgan@com.ohio.gov
kirsten.l.anderson@dcbs.oregon.gov stephen.gordon@dcbs.oregon.gov
Gordon, Stephen
Pennsylvania Department of Banking and Securities Cestello, Alison
acestello@pa.gov rolopez@pa.gov memiddleto@pa.gov
Lopez, Robert
Middleton, Meghan
South Carolina Division of Banking Fleming, Aaron
aaron.fleming@banking.sc.gov
Tennessee Department of Financial Institutions Casselberry, Grant
grant.casselberry@tn.gov alisse.fowler@tn.gov michael.glaser@tn.gov
Fowler, Alisse Glaser, Michael
Ragan, Holly
holly.ragan@tn.gov
Utah Department of Financial Institutions Farnsworth, Bryan
bfarnsworth@utah.gov tremington@utah.gov aschilhabel@utah.gov
Remington, Teri Schilhabel, Angela
Washington Department of Financial Institutions Harvey, Matthew
matthew.harvey@dfi.wa.gov
SPEAKERS California Department of Financial Protection & Innovation Prosperi, Aaron
aaron.prosperi@dfpi.ca.gov
Federal Bureau of Investigation Custer, Keith
kacuster@fbi.gov sspillman@fbi.gov
Spillman, Steve
Federal Deposit Insurance Corporation Gardner, Jacob
jagardner@fdic.gov vamarshall@fdic.gov chrivera@fdic.gov
Marshall, Varanessa
Rivera, Chris
Federal Reserve Bank of Dallas Garza, Lorenza
lorenzo.garza@dal.frb.org
Federal Reserve Bank of Richmond Schemmel, Jason
jason.schemmel@rich.frb.org
Georgia Department of Banking and Finance Sneed, Melissa
msneed@dbf.state.ga.us
Maryland Office of the Commissioner Salazar, Antonio
tony.salazar@maryland.gov
North Dakota Department of Financial Institutions Kruse, Lise
lkruse@nd.gov
Royal Business Bank Polakoff, Scott Trepp Buschbom, Stephen
smpolakoff@icloud.com
stephen_buschbom@trepp.com
Truist Bank Ramani, Mo
mo.ramani@truist.com
CSBS STAFF Barnett, Susanna Cordova, Carlos Dargusch, William
sbarnett@csbs.org ccordova@csbs.org wdargusch@csbs.org jhays@csbs.org khoyle@csbs.org jjarmin@csbs.org bmilhorn@csbs.org smonnet@csbs.org mbquist@csbs.org arichardson@csbs.org tsiems@csbs.org bzubrick@csbs.org
Hays, John Hoyle, Katie
Jarmin, Jennifer Milhorn, Brandon Monnet, Sebastien Quist, May Beth Richardson, Amy Siems, Ph.D., Thomas
Zubrick, Brennan
In Our Risk Era (Mo’s Version) Mo Ramani March 2024
© 2024 Truist Financial Corporation. TRUIST, the Truist logo and Truist Purple are service marks of Truist Financial Corporation. All rights reserved.
The views and opinions expressed in this presentation do not necessarily state or reflect those of Truist Financial (Truist) and its subsidiaries. Disclaimer
2
IN OUR RISK ERA Table of Contents
2024 Risk Outlook
Credit Risks Overview
CRE Considerations
Generative AI/ML
Emerging Cyber Risks
Regulatory Relations
Other Risk Topics
Q & A
3
EYES OPEN 2024 Risk Outlook
4
2024 Risk Outlook
5
Source: Shifting Priorities, Enduring Risks: The 2024 RMA and Oliver Wyman CRO Outlook Survey
Staffing / Budget Trends
Risk headcount YoY changes
Risk budget YoY changes
6
Source: Shifting Priorities, Enduring Risks: The 2024 RMA and Oliver Wyman CRO Outlook Survey
...READY FOR IT? Credit Risks Overview
7
Emerging Credit Risks
Consumer FOMO continues to fuel confidence with financial leverage Geopolitical instability Fed easing / Soft landing? Contagion risk / Counterparty risk Strong housing market / Lack of supply Corporate layoffs continue Continued growth in non-bank competition Macro Trends
Areas of Concern
Elevated rates and impact on DTI / Debt Service Coverage Student loan repayments Record credit card debt Falling auto prices CRE Office / Multifamily / Senior Housing Leveraged finance market Non-reported debt (BNPL, etc.)
8
Consumer Credit Card Balances
9
Source: New York Fed Consumer Credit Panel/ Equifax
Consumer Health
10
Source: Goldman Sachs Economics Research
Post Pandemic Credit Scores
11
Source: Federal Reserve, Intex, Goldman Sachs Global Investment Research
Banks Tightening Lending Standards
12
Source: Oxford Economics/Haver Analytics
BLANK SPACE CRE Considerations
13
CRE – Industry Reserve Ratios
14
Source: Shifting Priorities, Enduring Risks: The 2024 RMA and Oliver Wyman CRO Outlook Survey
In-person Activities vs RTO
15
Source: Morgan Stanley: Why The Commercial Real Estate Crisis Will Be With Us For A Long Time
MASTERMIND Generative AI/ ML
16
Generative AI Considerations
Aiding in software development
Enhancing marketing efforts where AI can generate content, optimize ads, and customize sales
Improving data insights and reporting
Assisting in customer support and advice
Strengthen existing fraud models with insights from unstructured data
Value Factors Driving Adoption
Big Tech offering secure, ethical Generative AI tools
Growing public adoption of Generative AI
Generative AI policies and procedures being developed
Evolving client expectations
17
Source: Truist Foundry
Generative AI Challenges and Risks
Reliance on AI
Data sharing and ownership
Risk of not adopting Generative AI
Explainability
Hallucinations, bias and adversarial robustness Reproducibility
Security implications
Unpredictable cost of ownership
Developing regulation and policy
Model accuracy
Deep fakes and phishing
Training and usage data exfiltration
18
Source: Truist Foundry
I KNEW YOU WERE TROUBLE Emerging Cyber Risks
19
Cyber-related Impacts on Financial Services Industry
Number of cases of data violation due to cyber attacks in financial services industry in the United States from 2019 to 2023
Share of attacks by industry 2019-2023
Number of Incidents
20
Sources: IBM; Statista
Key Cyber Considerations for Financial Services
Secure-by design software/ banking products
Phishing prevention
Supply chain security
Open banking
API security
Ransomware security
21
SAFE AND SOUND Regulatory Relations
22
2024 KPMG Regulatory Themes
‘Threat Actors’
Regulatory Intensity
6 7 8 9
1
Fairness
Risk Standards
2 3
Responsible Systems
Risk Sustainability
Security & Privacy
Growth & Resiliency
4
Data
Capital & Valuation
10
5
23
Source: KPMG Regulatory Insights
Ensuring Trust and Transparency with Supervisors
Demonstrating risk ownership across all lines of defense
Building and maintaining trust
Understanding regulatory priorities
Continuous improvement mindset
Reduced regulatory observations
Safety and soundness
24
Regulatory Relations
Regulatory Relations
Regulatory Supervisors
Truist
What does Truist Reg Relations Do?
Provides oversight/monitoring of Supervisory Matters
Leads end to end process for prudential regulators examinations
Handles ad hoc requests for regulators
Oversight of non prudential regulator examinations
Manages Continuous Monitoring meetings
25
Value of Routine Continuous Meetings
Additional Value in Face-to Face Meetings
Initial Benefits
Increased engagement and participation
Organic Collaboration
Limit technology issues
Enhanced communication
Proactive problem solving
Clarity and perspective
Clearer communication and goals
Mitigate distraction
Relationship building
26
CHANGE Other Risk Topics
27
Emerging Risk Programs
Climate
Automation oversight
Strategic workforce planning
Data risk
Resilience
28
…QUESTION? Q & A
29
Internal Use Only
2024 Economic Turbulence: Fed’s Soft Landing, CRE Air Pockets, and National Debt Altitude Increases Thomas F. Siems, CSBS Chief Economist
2024 CSBS Large Bank Supervisory Forum Baltimore, MD March 4, 2024
Internal Use Only
2024 Economic Turbulence Are We in a Recession Yet?
The Fed’s Pursuit of a Soft Landing
CRE Air Pockets
The Federal Debt Increases Altitude
Internal Use Only
2024 Economic Turbulence Are We in a Recession Yet?
The Fed’s Pursuit of a Soft Landing
CRE Air Pockets
The Federal Debt Increases Altitude
Internal Use Only
Internal Use Only
Coincident Economic Indicators
Personal Income
650
550
Manufacturing and Trade Sales
450
Coincident Economic Index
350
Industrial Production
250
Payroll Employment
150
Economic Indicators, Indexed (January 1959 = 100)
Sources: The Conference Board; Bureau of Economic Analysis
50
Jul-70
Jul-93
Jul-16
Jan-59
Jan-82
Jan-05
Jun-72
Jun-95
Jun-18
Oct-64
Oct-87
Oct-10
Apr-76
Feb-80
Apr-99
Feb-03
Apr-22
Sep-66
Sep-89
Sep-12
Dec-60
Dec-83
Dec-06
Aug-68
Aug-91
Aug-14
Nov-62
Nov-85
Nov-08
Mar-78
Mar-01
May-74
May-97
May-20
Internal Use Only
Internal Use Only
Internal Use Only
Total U.S. Nonfarm Payroll Employment Surpasses Former Peak by 5.4 Million
160,000
155,000
150,000
145,000
140,000
135,000 Thousands of Persons
130,000
Source: U.S. Bureau of Labor Statistics
125,000
Internal Use Only
Help Wanted! Still 9 Million Open Jobs Available in the U.S.
14000
12000
10000
8000
6000
4000
Job Openings (in Thousands)
2000
0
Jun-02
Jun-05
Jun-08
Jun-11
Jun-14
Jun-17
Jun-20
Jun-23
Sep-01
Sep-04
Sep-07
Sep-10
Sep-13
Sep-16
Sep-19
Sep-22
Dec-00
Dec-03
Dec-06
Dec-09
Dec-12
Dec-15
Dec-18
Dec-21
Mar-03
Mar-06
Mar-09
Mar-12
Mar-15
Mar-18
Mar-21
Internal Use Only
Internal Use Only
Leading Economic Index
120
100
80
60
40
20 Leading Economic Index (2016 = 100)
Source: The Conference Board
Note: Gray bars delineate economic recessions
0
Jul-70
Jul-93
Jul-16
Jan-59
Jan-82
Jan-05
Jun-72
Jun-95
Jun-18
Oct-64
Oct-87
Oct-10
Apr-76
Feb-80
Apr-99
Feb-03
Apr-22
Sep-66
Sep-89
Sep-12
Dec-60
Dec-83
Dec-06
Aug-68
Aug-91
Aug-14
Nov-62
Nov-85
Nov-08
Mar-78
Mar-01
May-74
May-97
May-20
Internal Use Only
Leading Economic Index
120
100
80
60
40
20 Leading Economic Index (2016 = 100)
Source: The Conference Board
Note: Gray bars delineate economic recessions
0
Jul-70
Jul-93
Jul-16
Jan-59
Jan-82
Jan-05
Jun-72
Jun-95
Jun-18
Oct-64
Oct-87
Oct-10
Apr-76
Feb-80
Apr-99
Feb-03
Apr-22
Sep-66
Sep-89
Sep-12
Dec-60
Dec-83
Dec-06
Aug-68
Aug-91
Aug-14
Nov-62
Nov-85
Nov-08
Mar-78
Mar-01
May-74
May-97
May-20
Internal Use Only
Internal Use Only
Leading Economic Index Signaling Recession
Internal Use Only
Moody's Analytics' Recession Probability Indicator Based on Economic Data
0 10 20 30 40 50 60 70 80 90 100
Jan 2024 25.9%
Probability of a Recession in the Next 12 Months (%)
Jul-05
Jul-16
Jan-00
Jan-11
Jan-22
Jun-06
Jun-17
Oct-02
Oct-13
Oct-24
Apr-08
Feb-10
Apr-19
Feb-21
Sep-03
Sep-14
Dec-00
Dec-11
Dec-22
Aug-04
Aug-15
Nov-01
Nov-12
Nov-23
Mar-09
Mar-20
May-07
May-18
Internal Use Only
Implied Recession Probability Based on the Yield Curve (10 yr minus 2 yr)
0 10 20 30 40 50 60 70 80 90 100
Feb. 28, 2024 51.4%
Implied Probability Based on Interest Rate Spread (%)
3-Jan-00
3-Jan-01
3-Jan-02
3-Jan-03
3-Jan-04
3-Jan-05
3-Jan-06
3-Jan-07
3-Jan-08
3-Jan-09
3-Jan-10
3-Jan-11
3-Jan-12
3-Jan-13
3-Jan-14
3-Jan-15
3-Jan-16
3-Jan-17
3-Jan-18
3-Jan-19
3-Jan-20
3-Jan-21
3-Jan-22
3-Jan-23
3-Jan-24
Internal Use Only
Fed Tightening Begins
Internal Use Only
CBSI Component Trends
180
160
131
140
119 118
120
91.9
96
100
81
73
80
60
40
>100=Positve Sentiment)
25
20
0
CBSI (100=Neutral; <100=Negative Sentiment;
CBSI
Business Conditions
Monetary Policy
Regulatory Burden
Operations Expansion
Capital Spending
Profitability Franchise Value
Q2 2019 Q1 2021 Q4 2022
Q3 2019 Q2 2021 Q1 2023
Q4 2019 Q3 2021 Q2 2023
Q1 2020 Q4 2021 Q3 2023
Q2 2020 Q1 2022 Q4 2023
Q3 2020 Q2 2022
Q4 2020 Q3 2022
Internal Use Only
Internal Use Only
81% of Community Bankers Indicate U.S. Economy starting, or in, a Recession
Internal Use Only
2024 Economic Turbulence Are We in a Recession Yet?
The Fed’s Pursuit of a Soft Landing
CRE Air Pockets
The Federal Debt Increases Altitude
Internal Use Only
The Fed and an Economic Soft Landing
Internal Use Only
Aggressive Monetary Tightening (Pace & Length of Recent Fed Tightening Cycles)
6
3/22-2/24+
5
6/04-9/07
4
3/94-7/95
3
12/15-7/19
2
6/99-1/01
1
Tightening Cycle (Percentage Points)
0
0
34
68
102 Increase in the Fed Funds Target Rate from Start of Fed 136 170 204 238 272 306 340 374 408 442 476 510 544 578 612 646 680 714 748 782 816 850 884 918 952 986 Number of Days Following Start of Fed Tightening Cycle 1020 1054 1088 1122 1156 1190 1224 1258 1292
Internal Use Only
Higher Inflation Rates Prompted the Fed to Begin to Tighten Monetary Policy...
12
Food Inflation
10
8
6
4
CPI less food and energy
CPI All Items
Inflation Rate (%)
2
Fed Tightening Begins
0
-2
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Jan-24
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Sep-22
Sep-23
May-16
May-17
May-18
May-19
May-20
May-21
May-22
May-23
Internal Use Only
...Resulting in Higher Interest Rates
9
Prime Rate
8
7
30-year Mortgage Rate
6
5
4
3
Interest Rate (%)
Fed Funds Rate
2
1
0
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Jan-24
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Sep-22
Sep-23
May-16
May-17
May-18
May-19
May-20
May-21
May-22
May-23
Internal Use Only
U.S. Applications for Home Purchase, Index
370
320
270
220
170
Fed Tightening Begins
120
4-Jan-19
4-Jan-20
4-Jan-21
4-Jan-22
4-Jan-23
4-Jan-24
Internal Use Only
Consumer Loan Delinqueny Rates
12
Real Estate
10
8
6
Total Loans
4
Credit Card
Delinquency Rate (%)
2
Personal
0
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1
2019Q1
2020Q1
2021Q1
2022Q1
2023Q1
Internal Use Only
Current Fed Tightening and the Most Severe Tightening in the Late 1970s 8/77-5/80
16
14
12
10
8
6
3/22-1/24+
4
2
Tightening Cycle (Percentage Points)
0
0
34
68
102
136
170
204
238
272
306
340
374
408
442
476
510
544
578
612
646
680
714
748
782
816
850
884
918
952
986
Increase in the Fed Funds Target Rate from Start of Fed
1020
1054
1088
1122
1156
1190
1224
1258
1292
Number of Days Following Start of Fed Tightening Cycle
Internal Use Only
U.S. Unemployment Rate
16
14
12
10
8
6
Unemployment Rate (%)
4
2
Source: U.S. Bureau of Labor Statistics
0
Internal Use Only
Monthly Job Growth: Slowing?
900
Fed Tightening Begins
800
700
600
3-month moving average
500
400
300
(Thousands of Workers, SA)
200
100
Net Monthly Payroll Employment Growth, Total Nonfarm
0
Internal Use Only
2024 Economic Turbulence Are We in a Recession Yet?
The Fed’s Pursuit of a Soft Landing
CRE Air Pockets
The Federal Debt Increases Altitude
Internal Use Only
Vacancy Rate Percent
Too Many Office Buildings?
Forecast
16
12
8
Office Industrial Multifamily Retail
4
0
4Q06 4Q08 4Q10 4Q12 4Q14 4Q16 4Q18 4Q20 4Q22 4Q24
Source: CoStar. Actual data are through fourth quarter 2023.
Internal Use Only
Falling Demand for Office Space
Actual Forecast
0.6
18
0.4
15
0.2
12
0.0
9
-0.2
6
Absorption/Stock (Percent, Left Scale) Completions/Stock (Percent, Left Scale) Vacancy Rate (Percent, Right Scale)
-0.4
3
-0.6
0
4Q07 4Q09 4Q11 4Q13 4Q15 4Q17 4Q19 4Q21 4Q23
Source: CoStar. Note: Actual data are as of fourth quarter 2023.
Internal Use Only
Most Employees in Big Cities Still Work from Home
60 Austin Houston Dallas Chicago New York Los Angeles Washington D.C. San Jose San Francisco Philadelphia Office Attendance - Percent of Pre-COVID 80 100
40
20
0
Source: Kastle Systems. Note: Office attendance is card swipes of Kastle access controls, averaged weekly through February 14, 2024.
Internal Use Only
CMBS Delinquency Rates by Major Property Type
8
7
Office
Retail
6
Lodging Overall
5
4
3
Multifamily
Delinquency Rate (%)
2
1
Industrial Source: Trepp
0
Internal Use Only
CMBS Delinquency Rates by Major Property Type
8
7
Office
6
5
Overall
4
3
Delinquency Rate (%)
2
1
Source: Trepp
0
Internal Use Only
Internal Use Only
Highest criticized office share of the 10 largest metros = 64.1% CRE Office Delinquency Rate:
Q4 2021 = 0.0% Q2 2023 = 25.2% Some Explanations: * Remote work
* Corporate downsizings * Rising crime * Decreasing business vitality
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Largest percentage increase in criticized office share of the 10 largest metros = 32.3% (from 0.4% in Q4 2021) CRE Office Delinquency Rate:
Q4 2021 = 0.0% Q2 2023 = 5.5% Some Explanations: * Remote work
* Corporate downsizings * Leases not being renewed * Zombie office buildings (22%) 53 buildings empty 126 buildings >50% empty
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2024 Economic Turbulence Are We in a Recession Yet?
The Fed’s Pursuit of a Soft Landing
CRE Air Pockets
The Federal Debt Increases Altitude
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The Federal Debt Debacle
• Federal Debt is Growing Rapidly • Interest Payments Are Rising with Higher Rates • Publicly-Held Debt-to-GDP Near Historical Highs
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Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024
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Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024 • 1 billion seconds from today: November 12, 2055
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Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024 • 1 billion seconds from today: November 12, 2055 • 1 trillion seconds from today: December 18, 33732
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Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024 • 1 billion seconds from today: November 12, 2055 • 1 trillion seconds from today: December 18, 33732 • YES! That’s 31,709+ years from now!
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27,168,056,539,211 HELD BY THE PUBLIC
$80,829 …….
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Peak = 106%
98%
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181%
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Does the U.S. Have a Spending Problem or a Revenue Problem?
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Average Interest Rate Paid on U.S. Treasury Debt
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Average Interest Rate (%)
Source: U.S. Department of Treasury
Jul-05
Jul-07
Jul-09
Jul-11
Jul-13
Jul-15
Jul-17
Jul-19
Jul-21
Jul-23
Nov-04
Nov-06
Nov-08
Nov-10
Nov-12
Nov-14
Nov-16
Nov-18
Nov-20
Nov-22
Mar-06
Mar-08
Mar-10
Mar-12
Mar-14
Mar-16
Mar-18
Mar-20
Mar-22
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Interest Expense @ Avg. Rate: 2014 = $428B 2023 = $962B
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Interest Expense @ Avg. Rate: 2014 = $428B 2023 = $962B
If at 4.7% (2005 fiscal year rate): Projected Interest Cost = $1.5T
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Most Economists Warn Against High Debt/GDP But Not All…
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Some Implications of Higher Debt/GDP: • Reduced Public Investment (from Higher Interest Payments) • Higher Cost of Capital (Crowds Out Private Investment) • Fewer Economic Opportunities for Americans • Greater Risk of Fiscal Crises • Challenges to National Security (with a Smaller Budget) • Jeopardizes the Federal Safety Net (Social Security, Medicare, etc.)
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Are There Critical Debt/GDP Thresholds? • Academic Research Generally Agrees that After 60%... Debt/GDP Economic Growth
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Are There Critical Debt/GDP Thresholds? • Academic Research Generally Agrees that After 60%... Debt/GDP Economic Growth • As this ratio increases… • GDP Growth Slows Even More • Interest Rates Rise Higher • Rating Agencies Downgrade Debt
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Federal Debt Held by the Public to GDP
120
100
80
60
40
20
Federal Debt Held by the Public to GDP (%)
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
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Federal Debt Held by the Public to GDP
120
> 80%
100
< 80%
80
60
< 50%
< 40%
40
20
Federal Debt Held by the Public to GDP (%)
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
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Annual Real GDP Growth Slows with Higher Debt/GDP
4.0
3.6
Median Average
3.5
3.2
3.0
3.0
2.7
2.5
2.2
2.2
2.0
2.0
1.8
1.5
1.0
Annual Real GDP Growth (%)
0.5
0.0
Under 40% (1970-1989) Under 50% (1990-2009) Under 80% (2010-2019) Over 80% (2020-2023)
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How to Reduce Debt/GDP: • Fiscal Austerity Measures • Cut Government Spending • Increase Tax Revenues • Faster Economic Growth (faster than debt growth) • Negative Real Return on Bonds (interest rates < inflation rates)
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How to Reduce Debt/GDP: • Fiscal Austerity Measures • Cut Government Spending • Increase Tax Revenues • Faster Economic Growth (faster than debt growth) • Negative Real Return on Bonds (interest rates < inflation rates) 1945 - 1975
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How to Reduce Debt/GDP: • Fiscal Austerity Measures • Cut Government Spending • Increase Tax Revenues • Faster Economic Growth (faster than debt growth) • Negative Real Return on Bonds (interest rates < inflation rates) ~40% ~40% ~20%
1945 - 1975
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The Federal Debt Debacle
• Federal Debt is Growing Rapidly • Interest Payments Are Rising with Higher Rates • Publicly-Held Debt-to-GDP Near Historical Highs • Conclusion: The U.S. Federal Debt Path is Unsustainable
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The Danger of Lagging Indicators CSBS Examiner Conference
46 East Main Street • Suite 303 • Somerville, NJ 08876 • P: (908) 234-9398 • finpro@finpro.us • www.finpro.us
© 2023 – FinPro, Inc.
Internal Use Only
Top 20 Risks . . .
1. Liquidity / Risk Profile (numerator and denominator) 2. Search for Core Deposits (Stable/Volatile/Immed Volatile) 3. Corporate Governance 4. Talent Management 5. Asset Quality / Credit Risk / Competition for good lns 6. Commercial Real Estate (Office Bldg) / Pipeline − Breakout C&I loans backed by real estate 7. Cost of Interest Bearing Deposits 8. Risk Management
17. Stress Testing
− Capital: baseline/severely adverse (also dividend impact) − AQ: shock to cash flow and collateral value − Mgmt: succession planning − Earnings: based on AQ, Liq, and Sensitivity shocks − Liquidity: baseline/uninsured − Sensitivity: +/- 400 (Beta/Decay/Prepay assumptions) 18. Appraisal discrimination − Appraisal Subcommittee − Jan 23 / May 23 / Nov 23 / Feb 24 − Feb 12, 2024 FFIEC Statement of Examination Principles 19. Section 1071 20. QUARTERLY – communicate with your regulator before your Call Report is uploaded
9. Transparency with the regulators 10. Cyber security – tabletop exercise 11. Third party risk management / fintechs 12. Concentration Risk 13. Succession Planning 14. Credible Challenge – document! 15. Board training 16. BSA / New Beneficial Ownership
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Internal Use Only
2023 CSBS Annual Survey: External Risks . . .
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2023 CSBS Annual Survey: Internal Risks . . .
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© 2023 – FinPro, Inc.
Internal Use Only The Community Bank Sentiment Index is an index derived from quarterly polling of community bankers across the nation.
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Internal Use Only
Wow, let’s talk about the Regulatory Burden . . .
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© 2023 – FinPro, Inc.
LIQUIDITY RISK
Home
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Internal Use Only Traditionally, Liquidity was analyzed using the following key metrics, which made sense in a cash centric society . . .
Liquidity Ratios - Current Quarter Liquidity Ratios - Current Quarter
Liquidity Type, Priority and Targets 1. Cash Liquidity – 2% to 5% 2. On Balance Sheet Liquidity >= 10% 3. On Balance + Borrowings Capacity >= 20% 4. Total Available Liquidity >= 25%
10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
45 .73%
25 .67%
10 .80%
0.0% 5.0%
The issue is that on-balance sheet cash liquidity is not available until day 2 or 3, by then the game is over!
1.26%
On Balance Sheet On Balance Sheet Liquidity Liquidity + Borrowing Capacity
Example Bank
Cash Liquidity
Total Available Liquidity
Total Cash and Cash Equivalents Available Current Unpledged Investment Capacity
6,888
6,888
6,888
6,888
52,139 59,027
52,139 59,027 81,349 140,377 140,377 518,747 28,000 546,747 25.67% 20.00%
52,139 59,027 81,349 140,377 109,663 250,040 518,747 28,000 546,747 45.73% 30.00% 15.73%
Total Cash + On Balance Sheet
6,888
Current Remaining Borrowing Capacity
Total Cash + On Balance sheet + Borrowing Capacity
6,888
59,027
Current Remaining Wholesale Capacity
Total Available Liquidity
6,888
59,027 518,747 28,000 546,747 10.80% 10.00%
Total Deposits
518,747 28,000 546,747
Short-Term Borrowings (< 12Months) Total Deposits + Short-Term Borrowings
Liquidity Ratio Threshold Level
1.26% 2.00%
Excess / (Deficit) of Threshold
(0.74%)
0.80%
5.67%
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© 2023 – FinPro, Inc.
Internal Use Only The 2023 Banking Crisis proved that the antiquated liquidity risk framework was lacking several key elements . . .
The failures in March of 2023 introduced a digital run at record speed demonstrating that the industry could not count on antiquated liquidity analytics and should take the following steps to modernize their liquidity risk framework. Track time sequenced liquidity metrics Shift from cash to fed master account availability Shift borrowing capacity in front of on-balance sheet liquidity Brokered and listing are acceptable funding sources for IRR and Liquidity Large deposits ($250k and up, large deposits, uninsured deposits) must be analyzed and uninsured deposits must be tracked Banks must rethink and redo their contingency funding plans
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© 2023 – FinPro, Inc.
Internal Use Only
Identify stable vs. volatile funding . . .
Stability Metrics for non maturity deposits: 1. Relationship with Director or shareholder 2. Within market area 3. Additional non-deposit services 4. Electronic banking services 5. Active demand deposit account 6. At market interest rate 7. Tenure of bank relationship
Short term volatile
Long term volatile
Stable Funding
Insured Deposits (i.e. < $250k) High Cost Deposit calc is critical Internet Deposit assessment is critical Uninsured Deposits Valid “high cost” deposits Valid “internet” deposits Municipal Deposits Large Depositors Listing Service
$$$
$$$
$$$
Core Funding Non-Core Funding Wholesale Funding Non Maturity Non Maturity Non Maturity Maturity Maturity Maturity
$$$
$$$
$$$
Brokered Deposits FHLB Borrowings Other Borrowings
$$$
$$$
$$$
core deposits: the sum of demand deposits, all NOW and ATS accounts, MMDAs, other savings deposits and time deposits under $250,000, minus all brokered deposits under $250,000
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© 2023 – FinPro, Inc.
Internal Use Only
The FinPro Liquidity Solution - A solution to modernize liquidity risk management . . .
1. Add Time Sequence Liquidity Analytics 2. FDIC needs to insure all deposits 3. Include pledged but unencumbered securities as a source of on balance sheet liquidity 4. Add term structured solutions at the Discount Window 5. Make contractual term deposits available, like brokered deposits 6. Enhance and standardize liquidity ratios by measuring liquidity against non-contractual maturity deposits 7. Implement new stress tests and assign appropriate waterfalls
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© 2023 – FinPro, Inc.
Internal Use Only Time series liquidity methodology is a necessary step for liquidity analytics . . .
Liquidity Ratios - Policy and Collateral Liquidity Ratios - Time Series
10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
45 .73%
25 .67%
16 .14%
0.0% 5.0%
1 .26%
Example Bank
Minute 1
Day 1
Week 1
Month 1
6,888
Total Cash and Cash Equivalents Available Current Remaining Borrowing Capacity Current Unpledged Investment Capacity Current Remaining Wholesale Capacity
81,349
52,139
109,663 250,040 518,747 28,000
6,888
88,237 518,747 28,000
140,377 518,747 28,000
Total Available Liquidity
518,747 28,000
Total Deposits
Short-Term Borrowings (< 12Months)
1.26%
16.14%
25.67%
45.73%
Liquidity Ratio
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© 2023 – FinPro, Inc.
Internal Use Only
Rather than continue to focus solely on these historical categories, we must add time sequencing to our liquidity analytics to reflect the new digital reality . . .
Minute 1 Day 1
Week 1 Month 1 Forward Cash Flow
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© 2023 – FinPro, Inc.
Internal Use Only
Let’s talk about a bank’s Liquidity Risk Profile
What are the key risk components? − Uninsured − Stable vs Volatile − Loan Funding
What is the timing element of these risk components (e.g., predictable cash flow)? How should a bank “stress test” the key risk components? How should a bank “stress test” the timing element? What about concentration risk − Individual − Industry (NAICS) − # accounts that control % deposits
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Internal Use Only
As part of this liquidity analysis process, banks should also. . .
Review all uninsured deposit levels and track balances (even if less than $1 billion in assets) Assign NAICS codes to each uninsured depositor to determine concentrations Contact the depositors to ensure relationship and stability Compare its uninsured deposit levels to Day 1 liquidity levels
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Internal Use Only
Let’s talk about Insured Deposit Risk versus Liquidity Risk . . .
Subsidiary ledger versus control − CDARS − ICS
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Internal Use Only
Over half of the banking industry is part of the IntraFi network that allows customer deposits to be fully insured. CDARS: − Certificates of Deposit − For new deposits, every Wednesday will be settled throughout the IntraFi network ICS: − Non maturity deposits (either non-interest bearing or money market) − For new deposits: − Manual Processing: every Day will be settled starting at 2:30 pm and ending at 4:00 pm throughout the IntraFi network − Integrated processing: next Day − It should be noted that even if a Bank is doing the processing on an integrated basis, the Bank can choose to run it manually to ensure same day settlement The cost is 12-15 bps to your bank − For a bank with 30% uninsured deposits, it would cost ~ 3-5 bps of ROAA to insure all of these deposits − The cost can be shared by lowering the rate on these deposits compared to your deposits rates If necessary, address uninsured deposit levels through CDARS and ICS . . .
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Source: https://www.intrafinetworkdeposits.com/
© 2023 – FinPro, Inc.
Internal Use Only
Move from hard currency to funds available at the Fed master account . . .
Minute 1 Liquidity = Cash Equivalents with a target of ≥ 5.00%
A lesson learned is that the deposit run from Silicon Valley happened virtually and extremely quickly As such, one big change is that the driver has shifted from vault cash to funding available in the fed master account. Real time cash movements (ala FedNow) will only put more pressure on this reality.
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© 2023 – FinPro, Inc.
Internal Use Only
Move from on balance sheet liquidity to borrowing capacity . . .
Day 1 Liquidity = Minute 1 Liquidity + Borrowing Capacity (e.g. pledged but unencumbered assets) with a target of >= 20% Traditional liquidity would first focus on on-balance sheet capacity, but the speed at which banks can convert on balance sheet liquidity into cash takes time (too much time or in some cases too much loss). Banks need to understand the speed at which on balance sheet liquidity is truly available: Treasury bills, bonds, and notes: T + 1 Agency bonds: T + 2
Corporate bonds: T + 2 Municipal bonds: T + 2 Mortgage-Backed securities: T + 2
The establishment of the Bank Term Funding Program by the Federal Reserve could be viewed as an acknowledgment that immediate borrowing capacity is more critical than some traditional on-balance sheet liquid assets.
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© 2023 – FinPro, Inc.
Internal Use Only
Borrowing capacity typically has the following same day availability timeframe . . .
FHLB: − Overnight funding is credited to a bank’s account quickly with the cut off at 5:00 pm. − Term funding must be secured before noon for same day settlement. Otherwise ,it will be the following day. If secured before noon, a bank’s account is typically credited quickly. FRB − Can secure funding up until 7:00 pm (like any other discount window program). FRB prefers that banks do not secure funding this late. − A bank’s account will be typically credited within 15 to 30 minutes.
Unsecured Borrowings and other lines − Cannot count on these sources for capacity in a crisis as they typically dry-up when needed − Good for diversity Bank Term Funding Program
− Great program. Do not use as a leverage funding strategy. − Be aware, the BTFP has a sunset date of March 11, 2024.
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Internal Use Only
Should the FDIC insure all deposits . . .
Insuring all deposits will reduce the runoff risk experienced during the March 2023 banking crisis by increasing consumer confidence and reducing the contagion associated with reputational risk. This can be achieved in two ways – 1. The FDIC enhances insurance limits to insure all deposits. − Deposits over $250 thousand will receive a higher insurance premium than traditional insured deposits to price in the risk. This should be equivalent to the cost of Intrafi or 12 to 15 basis points. 2. The industry makes a concerted effort to move all uninsured deposits into private insurance solutions − Intrafi provides a low-cost insurance solution for uninsured deposits
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© 2023 – FinPro, Inc.
Internal Use Only
Include pledged but unencumbered securities as a source of on balance sheet liquidity . . .
Bank Investment Policies often center on holding investments as a secondary source of liquidity. With the unrealized loss position in investment portfolios, reputation risk associated with a loss trade, and the proliferation of the Bank Term Funding Program, selling securities for liquidity purposes has moved down the liquidity waterfall. The most logical liquidity strategy with the investment portfolio is to maximize borrowing capacity by pledging eligible unencumbered securities to the Bank Term Funding Program, and if ineligible the Discount Window or FHLB, to increase secured contingent liquidity capacity. The second step in this process is to continually monitor and report on pledged but unencumbered securities as a source of on balance sheet liquidity. This strategy maximizes investment portfolio liquidity by increasing secured borrowing capacity while also maintaining adequate on balance sheet liquidity by holding unencumbered securities during normal operating periods. Depending on a Bank’s Contingency Funding Plan, it could either borrow against the securities (encumber them) or sell them to stave off a liquidity stress.
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