Crisis
Management
What Really Happens?
9 A jump from normal conditions to serious
crisis is extremely rare. It is more common to
see steady or lumpy deterioration.
9 Initial reactions are often denial, minimization
and deferral. (And some CYA.)
One Key Truth
Once a crisis blooms, few
management tools are available.
The most important aspects of
crisis management are, therefore,
quick recognition of non-normal
conditions and prompt responses.
Stages of a Funding Crisis
4
Six Internal Triggers for Identifying the
Onset of Bank Specific Non-Normal
Conditions
Increasing levels of delinquent and non-accrual loans.
Adverse trend in overnight and short-term net funds sold/funds
borrowed.
Adverse trend in liability concentrations from non-sticky sources.
Adverse trend in the size of the liquid asset reserve. Approaching
the bank’s limit / minimum.
Approaching or exceeding limits /minimums for forecasted cash flow.
A decline in earnings.
5
Six External Triggers for Identifying
the Onset of Bank Specific
Non-normal Conditions
Widening funding spreads relative to peers.
Adverse trend in deposit growth.
Adverse trend in renewal of maturing liabilities - especially noninsured, unsecured.
Temporary funding difficulties or turn downs of borrowing
requests.
Decline in stock price relative to peers.
Downgrading by a rating agency (lagging indicator.)
6
Six External Triggers for Identifying
the Onset of Systemic
Non-normal Conditions
General signs of a credit crunch such as increased use of
commitments by credit worthy counter-parties.
Slow downs or weakening in key economic sectors, for example
commodity prices or home prices.
Slower deposit growth and increased competition for deposits.
Adverse change in fiscal policy, monetary policy, banking regulation or
other government regulation.
Declining stock prices or earnings multiples for financial institutions in
your market.
Ratings downgrades for one or more competitors.
7
More Triggers for Identifying the Onset
of A Need For More Prudential Liquidity
An increase in the level of nonperforming assets -particularly, if your bank's problem assets are larger or
growing faster than your peers.
Significant asset growth or acquisitions.
Pressure to buy back liabilities or support market
Legal, regulatory or tax changes that make your
business more competitive, more restricted or more
expensive
8
Crisis Management
™ Remedial actions must be identified. Measurement, management,
policies and CFPs must deal with remedial actions consistently and
with specificity.
™ Actions that can be taken without clobbering earnings need to be
identified and implemented.
Intelligent diversification.
Opportunistic funding.
Change mix of marketable securities to reduce sensitivity to
adverse market developments.
Improve collateral management
Place acceptable collateral with FRB
™ Actions with deleterious earnings impact need to be considered in
light of “path to the exit”.
9
The Crisis Management Team
Instead of informal and haphazard communications among senior managers and internal
risk experts, a crisis management team serves as a forum where members can avoid
duplication of assigned responsibilities, make sure that everyone isn’t assuming that
someone else is doing a key task, increase the efficiency of decision making and
improve communications.
When the CFP is invoked, this previously defined group springs to life.
The purpose of a crisis management team is to direct the implementation of the CFP.
The crisis management team coordinates the implementation of the relevant CFP
provisions, keeps people organized, keeps tasks prioritized and follows up to ensure that
decisions were implemented properly.
“The formation of a crisis management team is vital to the success of any contingency
funding plan. Experience has shown that a team of highly skilled staff members is
necessary to quickly asses the evolving situation, rapidly decide a course of action,
implement the actions, monitor the situation, and take corrective actions as necessary.”
Paul A. Decker, The Changing Character of Liquidity and Liquidity Risk Management, The Journal of Lending
& Credit Risk Management, May 2000, Page 32.
Liquidity Reporting in a Crisis
9 Increase the frequency of liquidity reports. For example, from
monthly to weekly in the early stages of a potential crisis and
from weekly to daily in a crisis.
9 Increase the amount of detail shown in the bank’s liquidity
reports. For example, a cash flow gap report that normally
shows expected inflows and outflows grouped by month might
be expanded to show weekly forecasts.
9 Add supplemental liquidity reports for selected early warning
indicators. For example, the bank may begin daily tracking of
the spread between the rates it has to pay for new funds and
rates paid by peers.
9 Add supplemental liquidity reports of contingent needs and
sources.
Example Remedial Actions for
a Bank Specific, Heightened
Level of Risk
9 Review opportunities to increase the size of the liquidity reserve (perhaps
by switching some asset holdings from less liquid instruments or perhaps
by obtaining new term borrowings that can be invested in new liquid
assets.)
9 Intensify collateral management to free additional collateral.
9 Review opportunities to alter the mix and the terms of either assets or
liabilities to increase net cash flow cushions in the overnight, 7-day, 30day, and 90-day buckets.
9 Begin reporting liquidity risk information to senior
committees and directors more often and in more detail.
managers,
risk
9 Update reports, with contact information, listing the bank’s largest funds
providers.
Example remedial actions for a bank
specific problem, medium stress level.
9 Implement pre-crisis plans for daily cash flow forecasts and supplemental
reports.
9 Restrict new lending as much as possible without risking further reduction in
customer confidence.
9 Cease trading activities.
9 Increase cash held in branches and ATMs merely to avoid a potentially
embarrassing shortage.
9 Move collateral to the central bank(s) if required.
9 Tap alternative funding sources (e.g., tri-party repurchase agreements for
illiquid securities, MTN-program in local markets, etc.)
9 Intensify efforts, employee incentives and/or customer incentives for
deposit retention.
9 Discontinue any financial support for bank obligations trading in the
secondary market.
9 Evaluate opportunities to sell illiquid assets or business units if the funding
problem worsens.
Multiple Currency Challenges
Country Risk
Transferability
• political risk/expropriation
• Cash or collateral cannot usually be
transferred from one country to
another during a liquidity event.
• F/X convertibility
• Economic/country crisis
• In some countries, cash or
collateral cannot be transferred
between legal entities during a
liquidity event.
• Some regulators require minimum
liquid asset level maintenance.
$
€
£
¥
Convertibility
• Markets for some currencies are usually thin.
• Convertibility can be a problem when markets are distressed.
14