OCC Updates Procedures for Monitoring Banks' Liquidity Risk

The OCC updated its guidance for examiners on assessing a bank's liquidity risk management practices.

In a revised "Comptroller's Handbook" on liquidity, the OCC said that in order to effectively monitor a bank's liquidity risk management practices, examiners should have a "sound understanding" of the bank's:

• projected (i) funding sources and needs, (ii) borrowing capacity and collateral positioning, and (iii) funding costs;
• net cash flow and liquid asset positions;
• vulnerability to rollover risk; and
• funding needs for unfunded commitments.

To prevent the "immediate and dire" consequences of inadequate liquidity risk management, the OCC stated that examiners should ensure that a bank has incorporated into its risk management procedures:

• corporate governance that includes board oversight and management involvement;
• systems to measure liquidity risk;
• active management of intraday liquidity and collateral;
• a variety of funding sources, in addition to "adequate levels" of highly liquid marketable securities;
• comprehensive contingency funding plans; and
• audit processes.

The OCC also identified key factors that can increase a bank's liquidity risk, such as: poor asset quality; high cash-flow volatility; insufficient liquidity asset amounts; rising fund costs in comparison to the characteristic profile of the assets funded; and concentrations of funding.