Banking Agencies Advise Depository Institutions on Contingency Funding

The Federal Reserve Board, FDIC, OCC and National Credit Union Administration advised depository institutions to take steps to ensure access to contingency funding under a range of possible stress scenarios.

In an Addendum to a March 2010 interagency policy statement titled "Funding and Liquidity Risk Management," the banking agencies directed depository agencies to assess the stability of their funding and maintain a "broad range of sources" by:

• being aware of the operational steps necessary to obtain funding from a variety of sources;
• frequently testing contingency borrowing lines to ensure staff know how to access said sources;
• assessing the potential operational challenges associated with moving and posting collateral to quickly access critical funding; and
• reviewing and revising contingency funding plans in accordance with changes in market conditions and strategic initiatives to "address evolving liquidity risks."

The banking agencies also promoted the use of the Federal Reserve Discount Window as a tool for depository institutions to manage liquidity risk, which they said can be incorporated into their contingency funding arrangements. Furthermore, for scenarios where a credit union’s liquidity and market funding sources are inadequate, the banking agencies encouraged the use of the Central Liquidity Facility to provide federally sourced backup liquidity.