On July 28, the Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the National Credit Union Administration (NCUA) (collectively, the agencies) issued an addendum to the agencies’ joint policy statement on funding and liquidity risk management, which advises depository institutions to assess and maintain a broad range of funding sources that can be accessed in adverse circumstances. Specifically, the agencies advised depository institutions to regularly test any contingency borrowing lines to ensure the institution’s staff are well versed in how to access them and that they function as envisioned.

“Depository institutions’ contingency funding plans should recognize that during times of stress, contingency lines may become unavailable … Depository institution contingency funding plans should take this dynamic into account and include a range of contingency funding sources.”

Due the adverse developments in the financial industry this spring, which followed on the heels of several high-profile bank failures, the agencies emphasized the importance of liquidity risk management and contingency funding planning. In particular, the unprecedented level and speed of deposit outflows at several banks serve as a reminder that depositor behavior and broader market conditions can evolve quickly and without warning and can lead to acute liquidity and funding strain.

In that context, the policy statement included guidance with respect to the use of two such contingency funding sources:

• The Federal Reserve “discount window.”
  • If the discount window is a part of an institution’s contingency funding plans, the agencies advised that institution should establish and maintain operational readiness to borrow from the discount window.
    • Operational readiness includes establishing borrowing arrangements and ensuring collateral is available for potential contingency funding needs.
    • Information regarding the discount window is available at FRBdiscountwindow.org.
  • The agencies further advised that an institution should ensure they are familiar with the pledging process for different collateral types and are aware that pre-pledging collateral can be useful if liquidity needs arise quickly.
• The NCUA Central Liquidity Facility.
  • Credit unions with assets greater than $250 million must document access to at least one contingent federal liquidity source. This may be done by maintaining membership in the Central Liquidity Facility or establishing borrowing access at the Federal Reserve discount window.
  • Information regarding the Central Liquidity Facility is available at ncua.gov/support-services/central-liquidity-facility.