1. Liquidity Risk Management What is the FDIC’s Guidance?
Karl Nelson
Director of Industry and Governmental Relations
Silverton Bank

2. What Is Liquidity Risk?
The risk that sources of funds will be unable to meet the institution’s needs for outflow of funds.
Sources of funds
Retail Deposit Inflows
Wholesale Funding
Cash Flows From Loans and Investments
Sale of Loans and Investments
Uses of funds
Deposit Outflows
Loan Commitments
Loan and Other Asset Growth
Mortgage put-backs

3. What are Your Liquidity Risks?
Reduced borrowing capacity
Increased collateral haircuts
Off-balance sheet exposure
PCA downgrade
Reduced mortgage prepayments
Asset quality affecting cash flows
Bad publicity, rumors
Available-for-sale accounting

4. Past Regulatory Oversight
Examiners focused on balance sheet position more than liquidity management
Liquidity measures focused on assets as the liquidity source
Investments liquid, loans were not
Deposits only stable source of funding
Skepticism related to other sources of funding

5. Modern Perspective Traditional sources are still well regarded, but:
Diversified funding is a positive
Management is at least as important as position
“What if ?” planning is essential

6. Liquidity Guidance (Financial Institution Letter 84-2008)
Recent disruptions in the credit and capital markets have exposed weaknesses in liquidity risk measurement and management systems.

7. Liquidity Guidance Major Highlights:
Banks using liability-based or off-balance sheet funding strategies, or that have other complex liquidity risk exposures, should measure liquidity risk using pro forma cash flows/scenario analysis, and should have contingency funding plans.
Contingency funding plans should stress testing that could rapidly affect an institution's liquidity.
The FDIC limits the use of brokered deposits by insured institutions that are less than well capitalized, and also limits the effective yield that these institutions may offer on all their deposits.

8. Liquidity Guidance
Contingency funding plans should outline practical and realistic funding alternatives that can be implemented as access to funding is reduced.
Institutions that use volatile, credit sensitive, or concentrated funding sources are generally expected to hold capital above regulatory minimum levels to compensate for this risk.
Examiners will continue to evaluate an institution's ability to maintain access to funds and liquidate assets in a reasonable and cost-efficient manner in both normal and stressed markets.

9. Tools to Measure Liquidity Risk
Ratios
Net non-core funding dependence
Large depositors to total deposits
Loans to deposits
Pledged to Total Securities
Loans to Assets
Contingency Funding Plan

10. Ratios Have Limitations
Definitions Differ From Reality
Not Forward Looking
Does Not Include Market Access and Borrowing Capacity
Limited Ability to Measure
Funding Concentrations
Contingency Funding Options
Management Strength and Planning

11. Contingency Funding Plan (CFP)
CFP is a Written Plan of Action for Various Adverse or Stress Scenarios
Monitor and Stress Test Scenarios
Review Scenario Assumptions and Triggering Events
Report Scenario Results
Test Strategies and Stress Events

12. A Good CFP Should…
Be customized to the liquidity risk profile of the bank
Identify the types of stress events which may be faced
Define responsibilities and decision making
Detail how management will monitor liquidity events

13. A Good CFP Should…
Consider triggering restrictions limiting access brokered/high-cost deposits
Identify and assess contingent funding sources
Consider any legal, financial and logistical constraints that might influence availability of back-up lines

14. Brokered and High Rate Deposits

16. Interest Rate Restrictions
12 U.S.C. § 1831f
12 C.F.R. § 337.6
Basic Concept: Restrictions depend upon bank’s capital level. As condition deteriorates, restrictions become more severe.
Well capitalized institutions may pay rates w/no restrictions
Adequately capitalized institutions with waivers to accept brokered deposits
Adequately capitalized institutions without waivers to accept brokered deposits
Undercapitalized institutions

17. Adequately Capitalized With Waivers to Accept Brokered Deposits
Rule: May not pay a rate of interest that “significantly exceeds” applicable market rate.
For deposits accepted within institution’s “normal market area,” the applicable market rate is the prevailing rate or “effective yield” on deposits of comparable size and maturity in that area.
For deposits accepted outside the institution’s “normal market area,” the applicable market rate is the “national rate.”
“Significantly exceeds” means more than 75 basis points.

18. Definitions
market area is defined as “any readily defined geographical area in which the rates offered by any one insured depository institution soliciting deposits in that area may affect the rates offered by other insured depository institutions operating in the same area.”
effective yields in the relevant markets are the average of effective yields offered by all other insured depository institutions in the market area in which deposits are being solicited.
I changed the lower case I in Is to begin the sentence.

19. Definitions cont…
An effective yield on a deposit with an odd maturity violates [these rules] if it is more than 75 basis points higher than the yield calculated by interpolating between the yields offered by other insured depository institutions on deposits of the next longer and shorter maturities offered in the market.”
“National Rate” Is defined as “(1) 120 percent of the current yield on similar maturity U.S. Treasury obligations; or (2) in the case of any deposit at least half of which is uninsured, 130 percent of such applicable yield.”
Reminder: Might need to change slide 5, speak with Lou first.

20. Adequately Capitalized Without Waivers to Accept Brokered Deposits
Rule: May not pay a rate of interest that significantly exceeds prevailing rate in institution’s normal market area. Thus:
For deposits accepted within the institution’s normal market area, the institution may not pay a rate that significantly exceeds the prevailing rate in the institution’s normal market area.
For deposits accepted outside the institution’s normal market area, the institution may not pay a rate that significantly exceeds the prevailing rate in the institution’s normal market area.

21. Undercapitalized Institutions
Rule: May not pay a rate of interest that significantly exceeds applicable market rate.
For deposits accepted within the institution’s own normal market area, the applicable market rate is the prevailing rate in the institution’s own normal market area.
For deposits accepted outside the institution’s own normal market area, the applicable market rate is the lesser of the following: (1) the prevailing rate in the institution’s own normal market area; or (2) the prevailing rate in the market area from which the deposit is being accepted.

22. Temporary Liquidity Guarantee Program (TLGP) Overview
Systemic risk exception invoked October 13, 2008.
FDIC announced and implemented TLGP October 14, 2008.
On November 2, 2008, FDIC extended the opt-out deadline to December 5, 2008 with the disclosure provision of the rule extended to December 19, 2008.
Purpose of TLGP is to strengthen confidence and encourage liquidity in the banking system.
TLGP consists of two components: debt guarantee program and the transaction account guarantee program.

23. TLGP – Debt Guarantee Program
Coverage
All senior unsecured debt issued October 14, 2008 thru June 30, 2009, with guarantees expiring no later than June 30, 2012.
May be denominated in foreign currency.
Guarantee limits
125% senior unsecured debt on books as of September 30, 2008 that is scheduled to mature before June 30, 2009.
Debt cannot be guaranteed if proceeds are used to prepay outstanding debt or if the debt is extended to an insider of the eligibility entity or an affiliated entity or to the affiliated entity itself.

24. TLGP – Debt Guarantee Program
Includes
Excludes
Exceptions
Promissory notes
Commercial paper
Unsubordinated unsecured notes
Certificates of deposit and Eurodollar deposits standing to the credit of a bank
Bank deposits in an international banking facility of insured depository institution
Obligations from guarantees or other contingent liabilities
Derivatives
Derivative-linked products
Debt paired with any other security
Convertible debt
Capital notes
Negotiable certificates of deposit
Deposits in foreign currency
Eurodollar deposits that represent funds swept from individual, partnership or corporate accounts held at insured depository institutions
FDIC may, in consultation with primary federal regulator, grant alternative threshold determination, if:
either zero balance or not reflective of normal practices, or
if eligible entity wishes to temporarily exceed 125% cap
Senior unsecured debt includes, e.g., federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit standing to the credit of a bank, bank deposits in an international banking facility (IBF) of an insured depository institution, and Eurodollar deposits standing to the credit of a bank. Senior unsecured debt may be denominated in foreign currency.
Senior unsecured debt does not include, e.g., obligations from guarantees or other contingent liabilities, derivatives, derivative-linked products, debt paired with any other security, convertible debt, capital notes, negotiable certificates of deposit, and deposits in foreign currency and Eurodollar deposits that represent funds swept from individual, partnership or corporate accounts held at insured depository institutions.
On a case-by-case basis, the FDIC may grant a participating entity authority to temporarily exceed the 125 percent limitation. It may also restrict the authority of an entity to issue guaranteed debt to a level below the 125 percent limitation. If an eligible entity had no senior unsecured debt prior to September 30, 2008, the FDIC will consider the circumstances of the eligible entity and may determine an alternate threshold calculation.

25. TLGP – Non-Guaranteed Long Term Debt
Once the participating entity has reached its 125% limit, it can issue debt that is not guaranteed, but it must disclose that such debt is not guaranteed.
If the entity wants to issue non-guaranteed debt before issuing the maximum amount of guaranteed debt, it must elect to do so on or before November 12, 2008.
This requires the entity to pay a nonrefundable fee equal to 75 basis points (annualized) of the entity’s senior unsecured debt (other than debt owed to affiliates) outstanding September 30, 2008 with a maturity date on or before June 30, 2009.
Once the entity has reached its 125 percent limit, it can issue debt that is not guaranteed by the Temporary Liquidity Guarantee Program, but the entity must specifically disclose that such debt is not guaranteed.
In addition, if a participating entity wants to have the option of issuing certain non-guaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt, it must elect to do so on or before December 5, Election of this option will require a participating entity to pay a nonrefundable fee in exchange for which it will be able to issue, at any time and without regard to the limit, non-guaranteed senior unsecured debt with a maturity date after June 30, The fee will be applied to the par or face value of senior unsecured debt, excluding debt extended to affiliates, outstanding as of September 30, 2008, that is scheduled to mature on or before June 30, The fee will equal the 75 basis point annual rate charged for six months (that is, 37.5 basis points).

26. TLGP – Debt Guarantee Program
Major Changes (as of 11/21/08):
The debt guarantee will be triggered by payment default rather than bankruptcy or receivership.
Short-term debt issued for one month or less will not be included in the TLGP, consistent with the objective of the program to facilitate longer term lending.
Altered Fees: Shorter-term debt will have a lower fee structure and longer-term debt will have a higher fee. The range will be 50 basis points on debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or longer annualized).

27. TLGP – Transaction Account Guarantee Program
Coverage
100% guarantee of noninterest-bearing transaction accounts held by FDIC-insured depository institutions (DIs) until December 31, 2009
In addition to and separate from the coverage provided under the FDIC’s general deposit insurance regulations at 12 CFR Part 330
Noninterest-bearing transaction account
Transaction account on which insured DI pays no interest and
Does not reserve the right to require advance notice of intended withdrawals
Exception: The FDIC Board voted to include NOW accounts with interest rates of 0.5% or less and IOLTAs (lawyer trust accounts) in the transaction account program.
Deposits in the noninterest-bearing savings account will be covered in compliance with the FDIC’s general deposit insurance regulations at 12 CFR Part 330.

28. TLGP – Transaction Account Guarantee Program
Includes
Traditional checking accounts that allow:
for an unlimited number of deposits and
withdrawals at any time
Official checks issued by an insured depository institution
Excludes
Negotiable order of withdrawal (“NOW”) accounts with interest rates of 0.5% or more
Money market deposit accounts (“MMDAs”)
Any funds in an account swept into an interest-bearing account
Exception
Funds swept from noninterest-bearing transaction account to a noninterest-bearing savings account
Fees: 10 basis points (annualized) until the end of After that date, these accounts will be subject to the basic insurance amount.

29. TLGP – Reporting Requirements
Leverage existing reporting mechanisms (i.e. FDICConnect) and other primary federal regulators.
Limited changes to the December Call Report.
Separate reporting will likely be necessary related to the FDIC-guarantee of senior unsecured debt and we will make those requirements known as soon as they are available.
The FDIC will leverage existing reporting mechanisms to the FDIC (i.e. FDICConnect) and other primary federal regulators. We are pursuing limited changes to the December Call Report, for example, to include the amount and number of noninterest-bearing transaction accounts above the temporary $250,000 limit.
Separate reporting will likely be necessary related to the FDIC-guarantee of senior unsecured debt and we will make those requirements known as soon as they are available.

30. TLGP - Communication
A dedicated website, houses current information, including
Federal Register notices,
FAQs,
press releases,
financial institution letters, and
technical briefings.
Updates via FDIC’s subscription service.
A dedicated website, will house current information, including FAQs, press releases, financial institution letters, and technical briefings.
Updates via FDIC’s subscription service.

31. Time For A Break!