Hoosier Banker 35 Examples of institution-specific events may include asset quality concerns, reputation risk, rapid growth and regulatory restrictions. Market-wide or systemic events may include capital market disruption, economic conditions, uncertainty in industry and changes in interest rates. A scenario that needs to be considered is one in which the bank has capital issues, becoming “less than well-capitalized” per the Prompt Corrective Action regulation. Falling to the “adequately capitalized” rating limits a bank’s access to various contingent funding sources. Restrictions on brokered deposits and paying high rates on deposits now come into play. Additionally creditors such as the Federal Home Loan Bank, Federal Reserve or correspondent banks will demand more collateral, reduce availability or terminate the borrowing line. Once you have your stress scenarios planned out, run them through a pro forma cash flow analysis, and determine whether your current liquidity levels can remedy the stress scenario. If not, look toward contingent liquidity sources to see if they are sufficient to fund the shortfall in liquidity. Ensure the results of your liquidity stress tests are discussed by the asset-liability committee, and the review is documented in the minutes. Finally, don’t forget about your contingency funding plan. The results of your stress testing should also play a key role in shaping the institution’s contingency planning. Therefore, stress testing and contingency planning are closely intertwined. Remember to stress your liquidity, not yourself! HB
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