Agencies update guidance on liquidity risks and contingency planning

The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Board of Governors of the Federal Reserve have jointly updated their Interagency Policy Statement on Funding and Liquidity Risk Management primarily to emphasize the need to regularly update financial institutions‘ contingency plans and liquidity risk management policies.
In their joint press statement and accompanying addendum to the policy, the regulators emphasize the importance of maintaining effective and up-to-date contingency funding plans for depository institutions. The events in the first half of 2023 have shown how quickly depositor behavior may change, leading to unexpected deposit outflows and thus perhaps to acute liquidity and funding challenges. Depository institutions, including credit unions, are advised to frequently evaluate their funding stability, maintain diverse funding sources, and be ready to access contingency funding, if so needed.
The addendum particularly highlights the need for regularly testing contingency borrowing lines to ensure that capital can be accessed quickly in critical funding situations. It is thereby important to consider that during stress, certain funding sources might become unavailable.
The addendum also suggests incorporating the Federal Reserve Discount Window into contingency funding plans. Where funding from the Discount Window is part of an institution’s contingency plan, it is highly recommended that depository institutions become familiar with the use of the Discount Window ahead of time, before any critical situation occurs. In this context, the regulators note that banks shall understand the process of pledging collateral and the type of collateral that may be used. In fact, they recommend to conduct „small value transactions at regular intervals to ensure familiarity with discount window operations“. Credit unions can also access the Central Liquidity Facility for „emergency“ liquidity, if so needed.