The Office of the Comptroller of the Currency has revised the “Liquidity” booklet of the Comptroller's Handbook for bank examiners, replacing a similarly titled document that dates back to February 2001.

The new booklet updates guidance to examiners and bankers on assessing the quantity of liquidity risk exposure and the quality of liquidity risk management.

Major revisions include:

  • A narrative that is more heavily focused on the management of liquidity, including an emphasis on maintaining appropriate levels of highly liquid assets and the importance of a well-developed planning process for contingency funding.
  • Additional guidance—particularly for those examiners responsible for examining large and internationally active banks—that goes beyond the September 2008 “Principles for Sound Liquidity Risk Management and Supervision,” issued by the Basel Committee on Bank Supervision and formally adopted by the OCC and other U.S. banking regulatory agencies.
  • The addition of specific guidance for examiners and bankers.

“A well-managed bank, regardless of size and complexity, must be able to identify, measure, monitor, and control its exposure to liquidity risk in a timely and comprehensive manner,” the booklet says, adding that changes in technology, product innovation, and funding dynamics have created “new challenges for liquidity managers.”

Among the industry changes cited as catalysts for the update was “intense competition and declining customer loyalty” that has increased the rate sensitivity of traditional retail deposits. Also, because “banking customers are now using deposit accounts more as transaction vehicles than savings vehicles and maintaining lower average excess balances,” bankers can no longer rely upon historically inelastic depositor behavior.

“The reliance on alternative sources of funding from the wholesale and brokered markets exposes banks to more rate and liquidity sensitivity than the reliance on traditional retail deposits did,” the OCC says. “Moreover, many banks have increased their use of products with embedded optionality on both sides of the balance sheet, which makes it more challenging to manage the corresponding cash flows. Liquidity risk management systems and controls must keep pace with these changes and added complexities. Given these changes in funding dynamics, liquidity management is more complex and requires a more robust risk management process.”

It is expected that all banks “manage liquidity risk with sophistication equal to the risks undertaken and complexity of exposures.”

“Critical elements” of a sound liquidity risk management process established by the board include:

  • Appropriate corporate governance and active involvement by management.
  • Appropriate strategies, policies, procedures, and limits used to manage and control liquidity risk, even in stressed conditions.
  • Appropriate liquidity risk measurement and monitoring systems.
  • Active management of intraday liquidity and collateral.
  • Maintaining an appropriately diverse mix of existing and potential future funding sources.
  • Adequate levels of highly liquid marketable securities, with no legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations.
  • Comprehensive contingency funding plans (CFP) sufficient to address potential adverse liquidity events and emergency cash flow needs.
  • Adequate internal controls surrounding all aspects of liquidity risk management.

In accordance with the OCC's supervision-by-risk approach, examiners will generally use the liquidity core examination procedures, which can be found in the 2010 “Community Bank Supervision” booklet and the 2010 “Large Bank Supervision” booklet in the Comptroller's Handbook. Examiners will supplement the procedures listed in these booklets, as appropriate, with the updated procedures detailed in the “Liquidity” booklet, for additional analysis of liquidity risk.

In conjunction to the new release, the OCC's “Funds Management” booklet of the Comptroller's Handbook has been rescinded, effective immediately. OCC Advisory Letter 2001-5, “Brokered and Rate-Sensitive Deposits,” has also been rescinded, while the “Joint Agency Advisory on Brokered and Rate-Sensitive Deposits” has been incorporated into the “Liquidity” booklet as an appendix.

Direct questions or comments regarding the booklet may be made to the Market Risk Policy Division at (202) 874-4660.