Five Prioriteis for Your Bank - Given the Uncertainty in Today's Financial Market

Written By:Michael Johnston

As we meet with our banking and financial clients and friends we are getting many questions about what are the most significant issues they should be focusing on. Inevitably, the answer most often comes back to two items: liquidity and capital. Almost every financial aspect of a bank is affected by liquidity and capital, and bankers today must be carefully monitoring and planning for liquidity and capital in almost every decision they make. While certainly not an exhaustive list, here are 5 things you should be doing to strengthen your liquidity and capital processes.

• Evaluate existing policies and reporting processes:
  Are your current capital and liquidity policies sufficient for your bank in this current environment? And are you diligently complying with the provisions of the policies? Make sure your policies are clear and provide direction and guidance on managing capital and liquidity. Policies should set forth specific parameters for components and measurements of capital and liquidity.



• Strengthen liquidity monitoring:
  Liquidity monitoring is not a process of static measurement or ratio analysis. Liquidity monitoring should include a weekly, monthly and quarterly cash flow analysis presenting the banks liquid asset position at the conclusion of each of these periods. This analysis should include expected loan activity, interest and operating costs, and deposit and other funding activity. This analysis demonstrates the banks ability to maintain acceptable liquidity levels, or will demonstrate an estimated point in time at which liquidity declines to an unacceptable level, allowing the bank advance notice to address the issue. Liquidity monitoring further includes identifying and monitoring sensitive liabilities, identifying uninsured deposit accounts, managing brokered deposit levels and maturity timeframes, and tracking deposit withdrawal rates.



• Strengthen liquidity contingency plans:
  Banks should make sure that they have developed realistic liquidity contingency plans that are meaningful to the banks operations. The plan should assign responsibilities for action during a contingency, and the bank should test the effectiveness of such plan. You should also maintain regular contact with contingent liquidity sources to maintain an assessment of the viability of the source. Note that as a bank's financial condition deteriorates, liquidity sources may be with drawn, or such sources may require that the available liquidity be collateralized.



• Enhance capital monitoring:
  Like liquidity monitoring, capital monitoring is not a process of static measurement or ratio analysis. Effective capital monitoring should include a monthly projection analysis presenting the banks expected capital position for at least the next 12 months, including an analysis under multiple operating scenarios. You should also prepare projected 12 month capital "shock" scenarios, meaning how much can the bank's capital decline during each projected period before the bank is no longer well-capitalized, or even adequately capitalized. The purpose of this analysis is to provide the bank with meaningful advance warning of a capital decline so there is plenty of time to address the issue before it is a contingency.



• Plan realistically for 2009:
  Bankers should be realistically planning for 2009, and planning under multiple scenarios. These plans should be re-addressed at least quarterly to ensure that they make sense for the bank in the current banking environment at that time.

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