Pub. 9 2019-2020 Issue 4

8 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S www.coloradobankers.org Tools for Managing Liquidity Risk FEATURE ARTICLE BY JEFFREY F. CAUGHRON Lessons Learned on Liquidity Risk The FDIC and other regulators continue to underscore the importance of sound liquidity risk management for financial institutions. The focus on liquidity has been building for some time as steady loan growth during the past several years has resulted in a decrease in short-term liquid assets and an increased reliance on wholesale funding sources. These are familiar patterns in the late phase of an economic cycle. In the wake of the 2008-09 financial crisis, for example, FDIC noted that disruptions in the credit and capital markets had exposed weaknesses in liquidity risk measurement and management systems. Among other things, specific mention was made of banks that relied on “liability-based” funding strategies or those that have “other complex liquidity risk exposures.” Those institutions were encouraged to use dynamic cash flow analysis to monitor their liquidity exposures and to have robust contingency funding plans. That remains good advice today for any who haven’t done so. Funding the Bank: A Brief History For generations, community banking was a process of gathering deposits from households and businesses that held excess cash and making loans