ABA Toolbox on Liquidity
Appendix A
CFP Stress Testing Assumptions and Results
The purpose of a stress test is to evaluate the potential effect of liquidity stress events on a financial
institution’s ability to fund its balance sheet. XYZ management has elected to run a short-term and longterm stress test on its business plan. The stress test is made up of the following key component parts.


Base Business Plan Cash Flow Analysis This analysis evaluates the cash flow impact of the
XYZ business plan on available liquidity as measured by the 1 year Cumulative Liquidity
Gap/Asset Ratio. The business plan being evaluated is the XYZ business plan beginning as of
12/31/2009 and extending out over a three year horizon.
Stress Tests The tests include the following:
o The Base Business Plan Cash Flow Analysis is stressed by modifying cash flows based
on a scenario where XYZ fails PCA well-capitalized standards. The purpose of this test is
to determine whether XYZ has sufficient sources of liquidity to meet funding outflow
needs caused by this stress. In addition, the objective is to develop a sequence of steps
that would be taken by XYZ to meet cash flow needs.
o A liquidity coverage ratio (LCR) test is run on the beginning balance sheet to determine
whether sufficient asset-based liquidity existed to cover stressed funding outflows. That
same test may also be run on the balance sheet that exists one year into the plan to
determine whether the plan has an undesirable adverse effect on asset-based liquidity.
Base Business Plan Sources and Uses and Twelve-Month Liquidity Gap/Assets Ratio
The business plan was developed by XYZ management to be used in setting performance targets and
evaluating continuing performance for the next year. While the plan looks forward three years, it is a
rolling plan that is updated on an annual basis. Years 1 and 2 of each plan forecast are used to evaluate
longer term effects of the plan being placed into execution from the standpoint of financial performance,
interest rate risk analysis, capital planning, and liquidity risk analysis. All three years of the plan are
designed to move XYZ in the direction of the strategic financial goals set in its capital planning process by
attempting to reach the annual goals laid out in the capital plan.
XYZ set goals to move investments from 6.5% to 9.0% of assets in Year 1 of the plan. That means the
business plan will need to incorporate levels of investment purchases sufficient to cover cash flows from
the investment portfolio in Year 1, plus those investment purchases needed to reach the investment
portfolio mix goals set forth in the business plan. As a result, uses of funds for investments (purchases)
would exceed sources (maturities and cash flows) by an amount sufficient to reach the investment goals
at the end of Year 1.
Figure 1 shows that XYZ plans to grow highly liquid unencumbered marketable (HLUM) securities in its
investment portfolio by $2 million in the first quarter of its business plan, another $4 million in the second
quarter, an additional $5 million in the 5th quarter and a final $4 million in the 9th quarter of the plan.
ABA Toolbox on Liquidity – Appendix A | 1
Figure 1
Liquidity Report
Total Investments Inflow
Outflow
Net
Cumulative by Year
Total Loans Inflow
Outflow
Net
Cumulative by Year
Non-Earning Assets Inflow
Outflow
Net
Cumulative by Year
TOTAL ASSETS Inflow
Outflow
Net
Cumulative by Year
Mar-2010 (Q)
Jun-2010 (Q)
Sep-2010 (Q)
611,942
2,611,942
(2,000,000)
2,695,965
6,695,965
(4,000,000)
892,971
892,971
(0)
33,917,376
25,564,993
8,352,383
33,653,818
26,371,358
7,282,460
18,610,665
11,544,495
7,066,170
610,318
610,318
857,362
857,362
1,374,288
1,374,288
35,139,636
28,176,935
6,962,701
37,207,145
33,067,323
4,139,822
20,877,923
12,437,466
8,440,458
XYZ Bank
Forecast Cash Flow Liquidity Report - Assets
Base Forecast - Capital Plan [Flat rates]
Dec-2010 (Q)
Mar-2011 (Q)
Jun-2011 (Q)
Sep-2011 (Q)
(Dollars in Thousands)
1,011,679
1,227,006
1,295,368
1,412,701
1,011,679
6,227,006
1,295,368
1,412,701
0
(5,000,000)
(0)
(0)
(6,000,000)
28,752,329
28,178,424
35,243,455
19,636,360
21,896,029
25,946,004
33,033,285
17,448,220
6,856,300
2,232,420
2,210,170
2,188,140
29,557,314
1,426,105
1,450,984
1,461,973
1,515,049
271,115
432,221
455,510
520,526
1,154,990
1,018,763
1,006,463
994,523
3,996,957
31,190,113
30,856,414
38,000,796
22,564,110
23,178,822
32,605,231
34,784,163
19,381,447
8,011,290
(1,748,817)
3,216,633
3,182,663
27,554,271
Dec-2011 (Q)
1,453,797
1,453,797
0
(5,000,000)
31,910,144
29,743,814
2,166,330
8,797,060
1,573,471
590,538
982,934
4,002,682
34,937,412
31,788,148
3,149,264
7,799,742
Mar-2012 (Q)
Jun-2012 (Q)
Sep-2012 (Q)
1,565,805
5,565,805
(4,000,000)
1,741,536
1,741,536
0
1,782,416
1,782,416
(0)
32,384,283
35,166,466
(1,077,740)
34,078,720
36,517,452
(1,083,150)
20,069,053
21,567,195
(1,088,570)
699,924
699,924
784,964
63,436
721,528
812,529
108,407
704,122
34,650,012
40,732,271
(4,377,815)
36,605,220
38,322,424
(361,622)
22,663,998
23,458,018
(384,448)
Dec-2012 (Q)
1,754,762
1,754,762
(0)
(4,000,000)
27,066,217
28,712,610
(1,094,020)
(4,343,480)
804,093
104,266
699,827
2,825,401
29,625,072
30,571,639
(394,194)
(5,518,078)
XYZ’s capital plan calls for it to reduce the size of the loan portfolio by 12% in 2010. That means that in
2010, cash flows from the loan portfolio (liability sources) should exceed loan originations (liability uses)
by an amount sufficient to reduce the loan portfolio by 12%. Cumulative loan sources exceed uses by
$29.6 million in Year 1 of the plan, and another $8.8 million in Year 2. The major portion of the loan
portfolio reduction is used to build HLUM securities in the investment portfolio and to shrink assets, which
drop from $300 million to $271 million by the end of the 8th quarter of the plan. On the other hand, in the
last four quarters of the plan, loans on a net basis turn into a use of funds, exceeding sources by $4.3
million. It is in Year 3 that loan growth goes from negative to positive as called for in the capital plan.
Non-earning assets that accumulate as a result of XYZ’s asset quality problem are converted back to
earning assets under its plan. In Figure 1, non-earning assets as a source of funds start in the range of $4
million per year in the first two years of the plan and decrease to $3 million in Year 3.
Overall, asset sources exceed asset uses by $27.6 million in 2010 and $7.8 million in 2011, providing the
cash to retire liabilities, which will allow XYZ to shrink its balance sheet.
In 2012, asset sources fall short of asset uses of funds by $5.5 million, the difference driving the growth of
the asset side of the balance sheet. The analysis of the asset side of the balance sheet fails to consider
changes in overnight investments and cash and due. They will be taken into consideration a bit later.
On the funding side of its balance sheet, as part of its capital plan, XYZ set a number of goals. One of the
goals was to grow Core Funding by 2% in 2010, followed with a 5% growth in 2011 and a 7% growth in
2012. At the same time, XYZ planned to reduce its reliance on Near-Core and Non-Core Funding from its
current 35.9% level to 28.4% in 2010, 23.3% in 2011, and 20.1% in 2012. That reduction is consistent
with its Near-Core and Non-Core Funding plan which sets the goal to reach a position where
approximately half of its Near-Core and Non-Core Funding limit is utilized as part of its base business
strategy with the other half available as a source of funding to deal with liquidity stress events.
Customer deposits remain relatively flat in the first year of the forecast, increasing from $582 to $583
million in the first 12 months of the plan (Non-Core plus Near-Core). From that point, deposits grow,
reaching $618 million by the end of the plan. Deposit sources and uses of funds for the first 8 quarters are
shown in Figure 2.
ABA Toolbox on Liquidity – Appendix A | 2
Figure 2
Liquidity Report
Mar-2010 (Q)
Jun-2010 (Q)
Sep-2010 (Q)
Core Funding Inflow
Outflow
Net
Cumulative by Year
Near-Core Funding Inflow
Outflow
Net
Cumulative by Year
Non-Core Funding Inflow
Outflow
Net
Cumulative by Year
Other Liab Inflow
Outflow
Net
Cumulative by Year
Capital Inflow
Outflow
Net
16,597,475
15,771,201
826,274
29,179,130
28,348,719
830,412
23,759,908
22,925,338
834,571
Total Liab & Capital Inflow
Outflow
Net
1,313,659
1,699,948
(386,289)
5,420,518
6,583,405
(1,162,887)
2,053,506
2,749,961
(696,454)
6,966,473
8,907,026
(1,940,554)
14,384,826
23,889,231
(9,504,405)
10,158,890
13,130,896
(2,972,007)
9,776
(9,776)
13,909
(13,909)
13,909
(13,909)
689,653
(689,653)
752,928
(752,928)
826,644
(826,644)
24,877,606
27,077,605
(2,199,999)
48,984,475
59,588,192
(10,603,717)
35,972,305
39,646,748
(3,674,443)
XYZ Bank
Forecast Cash Flow Liquidity Report - Liabilities & Capital
Base Forecast - Capital Plan [Flat rates]
Dec-2010 (Q)
Mar-2011 (Q)
Jun-2011 (Q)
Sep-2011 (Q)
(Dollars in Thousands)
15,539,710
14,700,959
838,751
3,330,007
2,266,005
2,809,915
(543,909)
(2,789,540)
5,631,989
10,888,153
(5,256,164)
(19,673,130)
13,909
(13,909)
(51,503)
841,560
(841,560)
(3,110,785)
23,437,704
29,254,496
(5,816,792)
(22,294,951)
20,064,158
17,526,869
2,537,288
32,453,485
29,877,947
2,575,538
33,933,798
31,319,433
2,614,365
1,403,900
1,754,597
(350,697)
3,051,534
5,172,609
(2,121,075)
5,482,753
5,862,276
(379,523)
10,285,272
14,846,947
(4,561,675)
8,938,388
11,530,583
(2,592,195)
8,616,906
10,178,962
(1,562,056)
4,000
(4,000)
4,000
(4,000)
4,000
(4,000)
235,456
(235,456)
291,715
(291,715)
132,162
(132,162)
31,753,329
34,367,869
(2,614,540)
44,443,407
46,876,854
(2,433,448)
48,033,457
47,496,833
536,624
Dec-2011 (Q)
17,495,182
14,841,405
2,653,777
10,380,968
1,944,750
2,225,447
(280,697)
(3,131,992)
5,007,097
9,402,255
(4,395,158)
(13,111,084)
4,000
(4,000)
(16,000)
124,553
(124,553)
(783,887)
24,447,029
26,597,660
(2,150,632)
(6,661,995)
Mar-2012 (Q)
Jun-2012 (Q)
Sep-2012 (Q)
22,013,301
18,415,611
3,597,690
29,415,857
25,745,732
3,670,124
33,985,467
30,241,449
3,744,017
879,334
1,159,084
(279,750)
1,422,385
1,570,289
(147,904)
3,894,445
4,599,058
(704,614)
12,197,125
13,703,538
(1,506,413)
11,447,464
13,145,813
(1,698,349)
11,895,453
13,088,302
(1,192,849)
3,000
3,000
3,000
3,000
3,000
3,000
156,008
156,008
135,470
135,470
351,707
351,707
35,248,767
33,278,233
1,970,534
42,424,175
40,461,834
1,962,341
50,130,071
47,928,810
2,201,262
Dec-2012 (Q)
21,379,209
17,559,811
3,819,398
14,831,230
1,799,676
1,981,692
(182,016)
(1,314,284)
3,396,590
4,187,499
(790,909)
(5,188,520)
3,000
3,000
12,000
235,680
182,552
53,128
696,313
26,814,155
23,911,554
2,902,602
9,036,738
Non-core funding shrinks by $19.6 million in the first year, $13.1 million in the second year, and $5.2
million of the third year of the plan as a result of deposit growth and asset reductions being used to pay
off maturing FHLB Advances and brokered CDs.
On an overall basis, Figure 2 shows that the business plan reduces XYZ’s liability and capital funding by
$22.3 million in 2010 (a net use of funds), and $6.7 million in 2011. Once the growth rate turns around in
2012, the liability and capital side of the XYZ balance sheet becomes a net source of funds of $9.0
million, providing the funding to grow the XYZ balance sheet. Note that any overnight borrowings on the
balance sheet are ignored in Figure 2.
The top portion of Figure 3 looks at the net cash flows coming from the balance sheet, ignoring cash and
due from, overnight investments, and overnight borrowings. Totals appear on the top line of Figure 3. Line
2 shows the sources on a cumulative basis. Uses of funds (asset and liability sources) are summed and
appear on Line 3 of the analysis. Cumulative uses of funds appear on Line 4. Sources are subtracted
from uses on Line 5, which shows the cash flow surplus or deficit for the quarter. Cash flow surpluses or
deficits are shown on a cumulative basis on Line 6. XYZ shows a cumulative cash flow surplus (sources
less uses) of $5.89 million over the three years of its business plan.
Figure 3
Liquidity Report
Mar-2010 (Q)
XYZ Bank
Forecast Cash Flow Liquidity Report - Liquidity Gaps and Ratios
Base Forecast - Capital Plan [Flat rates]
Jun-2010 (Q) Sep-2010 (Q) Dec-2010 (Q) Mar-2011 (Q) Jun-2011 (Q) Sep-2011 (Q)
(Dollars in Thousands)
86,191,620
56,850,228
54,627,817
62,609,744
82,444,203
70,597,567
146,208,862
203,059,090
257,686,908
320,296,651
402,740,854
473,338,421
92,655,515
52,084,214
52,433,319
66,973,100
81,661,017
66,878,280
147,910,055
199,994,268
252,427,587
319,400,688
401,061,705
467,939,985
(6,463,894)
4,766,014
2,194,498
(4,363,357)
783,185
3,719,287
(1,701,193)
3,064,822
5,259,320
895,964
1,679,149
5,398,436
Total Inflows
Cumulative Inflows
Total Outflows
Cumulative Outflows
Cash Flow Surplus (Deficit)
Cum Cash Flow Surplus (Deficit)
60,017,242
60,017,242
55,254,540
55,254,540
4,762,702
4,762,702
Total Inflows
Change in Overnight Position
Avail HLUM Sec, Cash, Overnite
Unused Borrowing Capacity
Total Available for Liquidity
Total Outflows
Total Liquidity Gap
Total Liquidity Sources/Uses
Total Liquidity Gap/Assets
60,017,242
(4,762,702)
15,872,820
13,717,820
84,845,180
55,254,540
29,590,640
153.55%
9.94%
86,191,620
6,463,894
13,408,925
20,143,612
126,208,052
92,655,515
33,552,537
136.21%
11.68%
56,850,228
(4,766,014)
18,174,940
22,342,316
92,601,469
52,084,214
40,517,256
177.79%
14.29%
54,627,817
(2,194,498)
20,369,438
25,815,670
98,618,427
52,433,319
46,185,108
188.08%
16.63%
62,609,744
4,363,357
21,006,081
29,682,234
117,661,415
66,973,100
50,688,315
175.68%
18.43%
82,444,203
(783,185)
21,789,266
33,422,104
136,872,388
81,661,017
55,211,370
167.61%
20.25%
Cumulative Inflows
Cum Change In Overnight Pos
Avail HLUM Sec, Cash, Overnite
Cumulative Available for Liquidity
Cumulative Outflows
Cumulative Liquidity Gap
Cum Liquidity Sources/Uses
Cumulative Liquidity Gap/Assets
60,017,242
(4,762,702)
15,872,820
13,717,820
84,845,180
55,254,540
29,590,640
153.55%
9.94%
146,208,862
1,701,193
13,408,925
20,143,612
181,462,592
147,910,055
33,552,537
122.68%
11.68%
203,059,090
(3,064,822)
18,174,940
22,342,316
240,511,524
199,994,268
40,517,256
120.26%
14.29%
257,686,908
(5,259,320)
20,369,438
25,815,670
298,612,695
252,427,587
46,185,108
118.30%
16.63%
320,296,651
(895,964)
21,006,081
29,682,234
370,089,003
319,400,688
50,688,315
115.87%
18.43%
402,740,854
(1,679,149)
21,789,266
33,422,104
456,273,076
401,061,705
55,211,370
113.77%
20.25%
Dec-2011 (Q)
Jun-2012 (Q)
Sep-2012 (Q)
Dec-2012 (Q)
59,384,441
532,722,862
58,385,809
526,325,794
998,632
6,397,068
Mar-2012 (Q)
69,898,780
602,621,642
74,010,504
600,336,298
(4,111,725)
2,285,344
79,029,396
681,651,037
78,784,258
679,120,556
245,137
2,530,481
72,794,069
754,445,106
71,386,828
750,507,384
1,407,241
3,937,722
56,439,227
810,884,333
54,483,192
804,990,577
1,956,035
5,893,757
70,597,567
(3,719,287)
25,508,554
35,578,346
127,965,179
66,878,280
61,086,900
191.34%
22.36%
59,384,441
(998,632)
26,507,185
39,383,940
124,276,934
58,385,809
65,891,125
212.85%
24.31%
69,898,780
4,111,725
26,395,460
42,468,326
142,874,291
74,010,504
68,863,786
193.05%
25.22%
79,029,396
(245,137)
26,640,598
44,599,502
150,024,358
78,784,258
71,240,100
190.42%
25.91%
72,794,069
(1,407,241)
28,047,839
47,377,476
146,812,143
71,386,828
75,425,315
205.66%
27.21%
56,439,227
(1,956,035)
30,003,874
49,511,436
133,998,502
54,483,192
79,515,310
245.94%
28.39%
473,338,421
(5,398,436)
25,508,554
35,578,346
529,026,885
467,939,985
61,086,900
113.05%
22.36%
532,722,862
(6,397,068)
26,507,185
39,383,940
592,216,919
526,325,794
65,891,125
112.52%
24.31%
602,621,642
(2,285,344)
26,395,460
42,468,326
669,200,085
600,336,298
68,863,786
111.47%
25.22%
681,651,037
(2,530,481)
26,640,598
44,599,502
750,360,656
679,120,556
71,240,100
110.49%
25.91%
754,445,106
(3,937,722)
28,047,839
47,377,476
825,932,699
750,507,384
75,425,315
110.05%
27.21%
810,884,333
(5,893,757)
30,003,874
49,511,436
884,505,886
804,990,577
79,515,310
109.88%
28.39%
ABA Toolbox on Liquidity – Appendix A | 3
Figure 3 shows a cash flow surplus of $4.763 million for the first quarter of 2010. The surplus increases
Cash & Due From and Overnight Investments by $4.763 million (Figure 3 section 2 line 2). The $4.763
million increase in Cash, Due From, and Overnight Investments is the offsetting use of funds that keeps
the balance sheet in balance. The second quarter shows a cash flow deficit of $6.464 million (section 1,
last line). Cash, Due From, and Overnight Investments decreases by $6.464 million providing the funds
needed to cover the cash flow deficit. However a portion of the cash flow deficit is due to the purchase of
$4 million of securities in the second quarter (Figure 1) so only a portion of the deficit is a true reduction in
asset-based liquidity. That net reduction in asset-based liquidity of $2.464 million can be seen can in
Figure 3 section 2, line 3 as a reduction in Available HLUM Securities, Cash and Overnight Funding from
$15.873 million at the end of the first quarter to $13.409 million at the end of the second.
From the end of the second quarter through the end of the 12-quarter forecast, available HLUM
securities, cash and overnight funding continue to build to a total of $30.003 million due to a combination
of cash flow surpluses adding to the Fed Funds Sold position and additional purchases of HLUM
securities, adding to XYZ’s asset-based liquidity
Figure 3 Section 2 arrives at the total funds available for liquidity needs by bringing down the total
sources from Section 1, adding changes in the overnight position, adding HLUM securities (net of cash
flows occurring in the quarter), and adding unused borrowing capacity. In XYZ’s case, there is a cash flow
surplus for all months of the forecast, except in the quarters in which XYZ takes a portion of its Fed Funds
Sold position and deploys it into the investment portfolio. At the same time, the business plan gradually
reduces XYZ’s reliance on Non-Core and near Core Funding, building its unused borrowing capacity. You
can see that occurring on Lines 4 and 5 of Section 2 of Figure 3.
The XYZ cumulative liquidity gap/asset ratio begins at the end of the first quarter at 9.9%. That ratio is
consistent with the fact that XYZ has little asset-based liquidity to deal with short-term stresses like the
one-month stress test delivered by the LCR. XYZ also has very little Near-Core and Non-Core borrowing
capacity available, with a Near-Core and Non-Core utilization equal to 35.9% of assets against a 40%
overall policy limit.
XYZ is just below the border between red and yellow on their policy statement threat level guidelines. By
the end of the second quarter the cumulative liquidity gap/assets is low in the yellow range at 11.68%. By
the end of the fourth quarter, the one-year cumulative liquidity gap/asset ratio is in the green range at
16.6%. From there, the liquidity gap/asset ratio continues to build, hitting 28.4% by the end of the threeyear forecast.
With the primary focus of the Liquidity Gap/Asset ratio being on the one-year cumulative gap, XYZ will
find itself in the green range, assuming they effectively execute on their business plan. Of course one of
the primary objectives in the business plan was to address XYZ’s weak liquidity position. It appears as
though this business plan meets that objective.
ABA Toolbox on Liquidity – Appendix A | 4
Short-Term Stress Test Using Modified Basel Liquidity Coverage Ratio
The first stress test applied to XYZ’s business plan is a test designed to evaluate the effect of a shortterm liquidity crisis brought on by stress events like a freeze up of the securitization markets or disasters
that may lock up the payment systems or cause customers to withdraw funds to meet short-term liquidity
needs. The purpose of the LCR test is to insure the institution has sufficient asset-based liquidity to meet
short-term needs. The LCR test makes the following assumptions:





The institution is cut off from all access to new non-core funding for 30 days.
A significant deposit runoff occurs in the 30 day period.
Incoming amortization and prepayment cash flows from loans and investments slow.
A portion of unused credit lines are drawn down by customers.
The most liquid investments can be converted into cash subject to haircuts specific to the
investment type.
XYZ management made the following assumptions in performing the LCR test.


Sources of funds
o Bank CDs, FHLB Stock, and FRB Stock were not available to meet liquidity needs under
this stress test as they are neither Level 1 nor Level 2 assets.
o Overnight investments were 100% available to meet liquidity needs.
o Treasuries and fully guaranteed Agencies are 100% available to meet liquidity needs.
o All other unpledged securities meeting the Level 2 test were subject to a 15% haircut.
o 100% of cash and NIB Deposits in other banks were available to meet liquidity needs.
o Investment amortization and prepayments – 100% of amortization and 50% of anticipated
prepayments are used as funding sources
o Loan amortization and prepayments – 50% of amortization and 0% of anticipated
prepayments are used as incoming cash flows.
Uses of Funds
o Deposits – 5% outflow in 30 days on highly stable deposits
o Deposits – 10% outflow in 30 days of less stable deposits
o Borrowings – Cash flows of all maturities and amortization must be funded without
additional borrowings.
o Firm commitments to originate – 100% utilization
o Unused credit facilities – 5% utilization
Figure 4 shows the summary results of this test. Outflows of funds total $14.204 million net of incoming
loan and investment cash flows. Total sources of funds from cash and HLUM securities are $11.177
million. The LCR is 78.7%. XYZ Green Light minimum on the LCR is 105%. Red light minimum is 100%.
XYZ is well short of its LCR policy limits.
Figure 4
Liquidity Coverage Ratio
Numerator (Net High Quality Liquid Assets)
Denominator (Net Cash Outflows)
78.7%
11,177,770
14,204,399
Target Ratio
Excess(Short)
100.0%
(3,026,629)
This deficiency is addressed in the XYZ business plan in a number of ways:

Investment purchases growing the investment portfolio by $6 million in the first year of the plan
(Figure 1) will focus on HLUM securities increasing the LCR numerator by $6 million.
ABA Toolbox on Liquidity – Appendix A | 5


XYZ’s overnight investments position grows by $5.2 million in the first year of the plan. (Figure 3
section 3).
XYZ is reducing its reliance on non-core funding by paying down brokered CDs and FHLB
advances. Over time this will reduce the LCR denominator, as there will be less outgoing cash
flows to fund under the LCR test.
It is anticipated that XYZ will pass the LCR test in the second or third quarter under this plan. Given the
strategies in the business plan it is anticipated that the LCR ratio will continue to grow throughout the
plan.
XYZ Market Dislocation Scenario
The Market Dislocation Scenario considers an inability to sell loans originated for sale in the secondary
markets, because the securitization markets freeze up, forcing XYZ to hold the loans in its portfolio. The
Market Dislocation Scenario is a low probability/high impact event and should normally be dealt with as a
stress scenario. In the XYZ case, normal levels of loans in the pipeline in any given month pending sale
are $3-5 million. Assuming XYZ chooses to honor verbal commitments to customers where there is not a
firm commitment, honor those written commitments to originate that have not yet closed, and deal with
loans in the pipeline that are already closed, XYZ’s maximum exposure would be in the range of $15
million or 5% of its balance sheet.
But in calculating its LCR, XYZ management has already run a much more severe 30-day stress test, so
a stress test is superfluous. The impact of the Market Dislocation Scenario is much less severe than the
LCR test for the following reasons:



XYZ is likely to have full access to its Non-Core Funding sources. Under the LCR, it is cut off from
all Non-Core sources.
XYZ is unlikely to see the deposit runoff, since lack of access to securitization markets is unlikely
to trigger a deposit run.
Even though XYZ does not currently pass the LCR test, XYZ has more than enough asset-based
liquidity to handle its maximum exposure. The following describes how XYZ would bring the
funding on line to handle this stress event.
Event
Securitization Markets freeze up making it
impossible for XYZ to sell loans originated
for sale in the secondary markets.
Action
1.
Immediately suspend committing to originate
loans for sale in the secondary market
2.
Determine whether sufficient asset and
liability-based liquidity exists to honor verbal
non-binding commitments
3.
In a manner consistent with maintaining key
customer relationships, reduce origination
of other loans until this short-term event
is resolved
4.
To the extent asset growth might cause an
undesirable decline in the capital ratio, fund
the retained loans using asset-based
liquidity
5.
To the extent asset growth does not cause a
decline in the capital/asset ratio, fund the
loans from XYZ non-core and near-Core
Funding sources
ABA Toolbox on Liquidity – Appendix A | 6
XYZ Payment System Disruption Scenario
The Payment System Disruption Scenario is a low probability/high impact scenario brought on by the
failure of a processing partner or a local disaster. The duration is limited to a few days. It should normally
be dealt with in a stress test; however, the LCR test is much more severe and occurs over a longer
duration (30 days). The XYZ Payment System Scenario is less severe for the following reasons:




While the event could cause a minor deposit outflow as individuals tap into liquidity, the outflow is
likely to be much less than in the
LCR test.
XYZ would likely have all of its Near-Core and Non-Core Funding available.
The level of asset-based liquidity called for in the LCR test is likely to be well above that needed
to deal with the Payment System Disruption Scenario without tapping into liability-based liquidity.
XYZ would bring the funding on line to handle this stress event in the following manner.
Event
Short-term payment system disruption occurs
causing XYZ to be unable to clear incoming
deposit transactions and payments on loans
Action
1.
To the extent short-term asset growth
creates capital concerns, tap into assetbased liquidity to meet liquidity needs during
this stress event
2.
To the extent short-term asset growth does
not create a capital concern, use a
combination of unused borrowing capacity
and asset-based liquidity to meet liquidity
needs during this stress event
ABA Toolbox on Liquidity – Appendix A | 7
Long-Term Stress Test – PCA Well-Capitalized Capital Failure
This stress test assesses the effect of a failure of PCA well-capitalized minimums. The following is a
potential sequence of events and effects in this stress test scenario:
Cause
Effect
Horizon
Economic Downturn and Lax
Underwriting
 Asset Quality Problem
 Increased Line Utilization
 Market Dislocations
3 Months
Asset Quality Problem
 Net Operating Losses
 Adverse Press
 PCA and CAMELS Downgrades
3 Months
Failure of Well Capitalized Status







Increased FHLB Haircuts
Loss of Access to Brokered CDs
Loss of Brokered Deposits
Adverse Press
PCA and CAMELS Downgrades
Rating Agency Downgrades
Limits on Deposit Offering Rates
3 Months




Loss of Large Depositors
Loss of Core Funding
Increased Line Utilization
Inability to Raise New Deposit
Funding
3 Months
Adverse Press
The primary objective in running changes in the assumptions is to test the effect of the PCA capital failure
on sources and uses of funds and available liquidity. The following changes are made to cash flow
assumptions in the Capital Stress Scenario to reflect the impact of the above sequence on XYZ business
plan cash flows.




Loans – Immediate
o Incoming cash flows due to amortization and prepayment reduced to 80% of plan levels
o Management response – loan originations reduced to 80% of plan levels
Investments - Immediate
o No new bond purchases. Cash flow from investments go to overnight position.
Deposits
o Year 1 – deposit growth continues based on business plan
o Year 2 – rather than deposit growth in business plan, a 5% deposit shrinkage is
anticipated
o Year 3 – rather than deposit growth in business plan, an additional 5% shrinkage is
anticipated.
Borrowings
o No change to term borrowings assumptions
o Overnight borrowings used as needed to balance the balance sheet.
Figure 5 shows a modified sources and uses of funds statement that reflects these changes in
assumptions over the first two years of the plan.
ABA Toolbox on Liquidity – Appendix A | 8
Figure 5
Liquidity Report
Mar-2010 (Q)
Jun-2010 (Q)
Total Investments Inflow
Outflow - Hold Investments
Net
611,942
2,611,942
(2,000,000)
2,695,965
2,695,965
-
Total Loans Inflow (85%)
Outflow (80%, 80%, 70%)
Net
28,829,770
20,451,994
8,377,775
28,605,746
21,097,086
7,508,659
610,318
610,318
30,052,030
23,063,937
6,988,093
Non-Earning Assets Inflow
Outflow
Net
Total Assets Inflow
Outflow
Net
Cumulative
Sep-2010 (Q)
892,971
892,971
(0)
XYZ Bank
Forecast Cash Flow Liquidity Report - Assets
Capital Scenario Stress Test
Dec-2010 (Q)
Mar-2011 (Q)
Jun-2011 (Q)
Sep-2011 (Q)
(Dollars in Thousands)
Dec-2011 (Q)
Mar-2012 (Q)
Jun-2012 (Q)
1,453,797
1,453,797
0
1,565,805
1,565,805
-
1,741,536
1,741,536
0
16,690,906
13,958,576
2,732,330
27,123,622
23,795,051
3,328,571
27,526,641
24,616,527
2,910,114
28,966,912
25,562,216
3,404,696
17,058,695
15,097,037
1,961,658
23,006,284
20,098,827
2,907,457
1,461,973
455,510
1,006,463
1,515,049
520,526
994,523
1,573,471
590,538
982,934
699,924
699,924
784,964
63,436
721,528
812,529
108,407
704,122
804,093
104,266
699,827
32,714,278
28,177,506
4,536,771
19,618,656
15,891,803
3,726,853
30,150,891
25,839,386
4,311,505
16,788,749
29,792,370
26,182,332
3,610,038
31,493,412
27,367,189
4,126,224
19,653,640
16,987,860
2,665,780
25,565,139
21,957,856
3,607,284
14,009,326
1,011,679
1,011,679
0
1,227,006
1,227,006
-
1,295,368
1,295,368
(0)
15,819,065
9,235,596
6,583,469
24,439,480
17,516,823
6,922,657
23,951,660
20,756,803
3,194,857
29,956,937
26,426,628
3,530,309
857,362
857,362
1,374,288
1,374,288
1,426,105
271,115
1,154,990
1,450,984
432,221
1,018,763
32,159,072
23,793,051
8,366,021
18,086,324
10,128,567
7,957,757
26,877,264
18,799,617
8,077,647
31,389,517
26,629,651
22,416,031
4,213,620
1,412,701
1,412,701
(0)
Sep-2012 (Q)
Dec-2012 (Q)
1,782,416
1,782,416
(0)
1,754,762
1,754,762
(0)
After the first quarter, purchases that increase the size of the investment portfolio are deferred. Instead,
the funds will end up in the more liquid Fed Funds Sold account, net of the results of other actions.
Existing investments are replaced as cash flows mature to maintain the size of the investment portfolio at
current levels.
Loan inflows are cut to 85% of current levels, reflecting a slowdown of prepayment speeds and a
slowdown of cash flows from collections of scheduled payments.
Loan outflows are trimmed to 80% of current levels in the first two years of the plan and 70% in Year 3.
XYZ management had already curtailed lending in the base business plan in order to shrink the balance
sheet in Years 1 and 2. These assumptions for the purpose of the stress test reflect a further reduction in
loan originations. The business plan had anticipated loan growth in Year 3 of the base plan. Under the
stress scenario, further loan portfolio shrinkage is anticipated in Year 3. These reductions in loan
originations take into consideration the potential for customers to draw down available credit lines to
ensure access to funds.
The asset side modifications result in a cumulative total of $31.4 million of net funds inflows in Year 1
(loan cash flows less originations), $16.8 million in Year 2, and $14.0 million in Year 3, compared with net
inflows in the base business plan (Figure 5) of $27.6 million in Year 1 and $7.8 million in Year 2. A net
outflow of $5.5 million was anticipated in Year 3 of the base strategy.
Figure 6
Figure 6 shows the result of stress testing on the liability and capital side of the balance sheet. The
numbers for this portion of the balance sheet prior to stress testing appear in Figure 2. Key modifications
to cash flow assumptions on the liability and capital portion of the balance sheet include the following:
Rather than Core deposit growth, the stress test assumes shrinkage of Core deposits by $17.6 million, a
little over 10% over the 36 months of the plan. Funding the deposit outflow results in a $17.6 million use
of funds over the three-year forecast. This outflow of Core Funding occurs as a result of negative
publicity, but helps accomplish the goal of shrinking assets to maintain higher capital/asset ratios.
ABA Toolbox on Liquidity – Appendix A | 9
Liquidity Report
Core Funding Inflow (90%)
Outflow
Net
Cumulative
Near-Core Funding Inflow - 85%
Outflow
Net
Cumulative
Non-Core Funding Inflow
Outflow
Net
Cumulative
Other Liab Inflow
Outflow
Net
Capital Inflow
Outflow
Net
Total Liab & Capital Inflow
Outflow
Net
Cumulative
Mar-2010 (Q)
16,597,475
15,771,201
826,274
Jun-2010 (Q)
Sep-2010 (Q)
25,385,843
28,348,719
(2,962,875)
20,671,120
22,925,338
(2,254,217)
1,116,610
1,699,948
(583,338)
4,607,441
6,583,405
(1,975,965)
1,745,480
2,749,961
(1,004,480)
1,253,000
8,907,026
(7,654,026)
4,148,000
23,889,231
(19,741,231)
13,130,896
(13,130,896)
9,776
(9,776)
13,909
(13,909)
689,653
(689,653)
18,967,085
27,077,605
(8,110,520)
XYZ Bank
Forecast Cash Flow Liquidity Report - Liabilities & Capital
Capital Scenario Stress Test
Dec-2010 (Q)
Mar-2011 (Q)
Jun-2011 (Q)
Sep-2011 (Q)
(Dollars in Thousands)
Dec-2011 (Q)
17,054,534
17,526,869
(472,335)
27,585,462
29,877,947
(2,292,484)
28,843,728
31,319,433
(2,475,705)
1,193,315
1,754,597
(561,282)
2,593,803
5,172,609
(2,578,805)
4,660,340
5,862,276
(1,201,936)
2,410,313
4,289,118
(1,878,805)
1,452,252
3,331,057
(1,878,805)
1,061,784
2,940,589
(1,878,805)
13,909
(13,909)
13,208,753
14,700,959
(1,492,206)
(5,883,025)
1,926,105
2,809,915
(883,810)
(4,447,593)
1,259,000
10,888,153
(9,629,153)
(50,155,307)
13,909
(13,909)
4,000
(4,000)
4,000
(4,000)
4,000
(4,000)
14,870,905
14,841,405
29,499
(5,211,025)
1,653,037
2,225,447
(572,409)
(4,914,432)
837,402
2,716,207
(1,878,805)
(7,515,220)
4,000
(4,000)
752,928
(752,928)
826,644
(826,644)
841,560
(841,560)
235,456
(235,456)
291,715
(291,715)
132,162
(132,162)
124,553
(124,553)
34,141,284
59,588,192
(25,446,908)
22,416,601
39,646,748
(17,230,147)
16,393,858
29,254,496
(12,860,639)
(63,648,213)
20,658,162
23,810,040
(3,151,878)
31,631,518
38,677,328
(7,045,810)
34,565,852
40,258,460
(5,692,607)
17,361,344
19,911,612
(2,550,268)
(18,440,564)
Mar-2012 (Q)
Jun-2012 (Q)
Sep-2012 (Q)
17,610,641
18,415,611
(804,970)
23,532,685
25,745,732
(2,213,047)
27,188,373
30,241,449
(3,053,076)
747,434
1,159,084
(411,650)
1,209,027
1,570,289
(361,262)
3,310,278
4,599,058
(1,288,781)
2,079,995
3,958,800
(1,878,805)
1,918,874
3,797,679
(1,878,805)
1,232,650
3,781,065
(2,548,415)
3,000
3,000
3,000
3,000
3,000
3,000
156,008
156,008
135,470
135,470
351,707
351,707
20,597,077
23,533,495
(2,936,418)
26,799,057
31,113,700
(4,314,644)
32,086,008
38,621,573
(6,535,565)
Dec-2012 (Q)
17,103,367
17,559,811
(456,444)
(6,527,537)
1,529,724
1,981,692
(451,967)
(2,513,660)
1,209,722
(1,209,722)
(7,515,747)
3,000
3,000
235,680
182,552
53,128
18,871,772
20,933,777
(2,062,005)
(15,848,631)
XYZ was already planning to reduce Near-Core Funding as part of its business plan. The stress test
assumes a reduction to only 85% of Near-Core deposit openings and renewals as compared to the levels
projected in the business plan. Projected uses of funds for outflows total $11.8 million over three years.
In the Non-Core section of Figure 6, all wholesale brokered CDs are allowed to run off, as a result of
regulatory actions barring the use of brokered deposits once risk-based capital failure has occurred.
Collateral haircuts will only allow 50% of FHLB advances to be renewed, so, the Non-Core portion of the
balance sheet shows a $50.2 million net outflow of funds in Year 1 and an additional $7.5 million runoff in
Years 2 and 3. By the end of the three years there are no remaining brokered CDs from a $47.0 million
portfolio on 9/31/09. The FHLB advances are reduced to $24.8 million from a $43.3 million portfolio.
Cumulative liability and capital outflows (uses of funds) total $63.6 million in Year 1, another $18.4 million
in Year 2 and $15.8 million in Year 3.
Figure 7 summarizes the results of the stress test, concentrating on the same gaps and ratios shown prestress in Figure 3.
The first section of Figure 7 indicates that a very significant cash flow deficit opens up in the stressed
scenario, reaching $35.7 million cumulatively, by seven quarters into the stressed version of the business
plan. From that point it fluctuates mildly, staying in the same general range through the 12th quarter of the
forecast. The cash flow deficit builds rapidly at first, as wholesale brokered CDs run off the books in the
first 18 months of the forecast, then stabilizes after the wholesale brokered CDs have all matured.
ABA Toolbox on Liquidity – Appendix A | 10
Figure 7
Liquidity Report
Mar-2010 (Q)
Jun-2010 (Q)
Sep-2010 (Q)
XYZ Bank
Forecast Cash Flow Liquidity Report - Liquidity Gap & Ratios
Capital Scenario Stress Test
Dec-2010 (Q) Mar-2011 (Q) Jun-2011 (Q) Sep-2011 (Q) Dec-2011 (Q) Mar-2012 (Q) Jun-2012 (Q) Sep-2012 (Q) Dec-2012 (Q)
(Dollars in Thousands)
43,271,121
47,287,812
64,345,796
54,184,508
47,512,235
50,389,447
58,292,469
51,739,648
44,436,911
199,093,517
246,381,329
310,727,125
364,911,633
412,423,868
462,813,314
521,105,784
572,845,432
617,282,343
48,054,113
46,226,071
66,854,834
56,150,263
45,750,998
49,715,826
58,480,889
55,609,432
42,891,632
231,352,213
277,578,284
344,433,118
400,583,381
446,334,379
496,050,205
554,531,094
610,140,526
653,032,159
(4,782,992)
1,061,742
(2,509,039)
(1,965,754)
1,761,237
673,620
(188,420)
(3,869,784)
1,545,279
(32,258,696)
(31,196,955)
(33,705,993)
(35,671,748)
(33,910,511)
(33,236,891)
(33,425,310)
(37,295,095)
(35,749,816)
Total Inflows
Cumulative Inflows
Total Outflows
Cumulative Outflows
Cash Flow Surplus (Deficit)
Cum Cash Flow Surplus (Deficit)
49,019,115
49,019,115
50,141,542
50,141,542
(1,122,427)
(1,122,427)
66,300,356
115,319,471
83,381,243
133,522,785
(17,080,887)
(18,203,314)
40,502,925
155,822,395
49,775,315
183,298,100
(9,272,390)
(27,475,704)
Total Inflows
Change in Overnight Position
Unused Borr Cap
Available HLUM Securities
Total Available for Liquidity
Total Outflows
Total Liquidity Gap
Total Liquidity Sources/Uses
Total Liquidity Gap/Assets
49,019,115
1,122,427
17,264,192
19,993,563
87,399,297
50,141,542
37,257,755
174.31%
12.51%
66,300,356
17,080,887
21,026,538
11,408,925
115,816,707
83,381,243
32,435,463
138.90%
11.29%
40,502,925
9,272,390
22,706,422
14,174,940
86,656,677
49,775,315
36,881,362
174.10%
13.01%
43,271,121
4,782,992
25,205,335
16,369,438
89,628,886
48,054,113
41,574,773
186.52%
14.97%
47,287,812
(1,061,742)
27,021,716
12,006,081
85,253,868
46,226,071
39,027,797
184.43%
14.19%
64,345,796
2,509,039
27,155,579
12,789,266
106,799,680
66,854,834
39,944,846
159.75%
14.65%
54,184,508
1,965,754
26,779,824
16,508,554
99,438,640
56,150,263
43,288,378
177.09%
15.85%
47,512,235
(1,761,237)
29,267,673
17,507,185
92,525,857
45,750,998
46,774,859
202.24%
17.26%
50,389,447
(673,620)
30,787,734
13,395,460
93,899,020
49,715,826
44,183,194
188.87%
16.18%
58,292,469
188,420
31,188,891
13,640,598
103,310,378
58,480,889
44,829,489
176.66%
16.30%
51,739,648
3,869,784
30,089,990
15,047,839
100,747,262
55,609,432
45,137,829
181.17%
16.28%
44,436,911
(1,545,279)
31,854,045
17,003,874
91,749,551
42,891,632
48,857,919
213.91%
17.44%
Cumulative Inflows
Cum Change in Overnight Pos
Unused Borr Cap
Avail HLUM Sec, Cash & Ov Inv
Cumulative Available for Liquidity
Cumulative Outflows
Cumulative Liquidity Gap
Cum Liquidity Sources/Uses
Cumulative Liquidity Gap/Assets
49,019,115
1,122,427
17,264,192
19,993,563
87,399,297
50,141,542
37,257,755
174.31%
12.51%
115,319,471
18,203,314
21,026,538
11,408,925
165,958,249
133,522,785
32,435,463
124.29%
11.29%
155,822,395
27,475,704
22,706,422
14,174,940
220,179,462
183,298,100
36,881,362
120.12%
13.01%
199,093,517
32,258,696
25,205,335
16,369,438
272,926,986
231,352,213
41,574,773
117.97%
14.97%
246,381,329
31,196,955
27,021,716
12,006,081
316,606,081
277,578,284
39,027,797
114.06%
14.19%
310,727,125
33,705,993
27,155,579
12,789,266
384,377,964
344,433,118
39,944,846
111.60%
14.65%
364,911,633
35,671,748
26,779,824
16,508,554
443,871,758
400,583,381
43,288,378
110.81%
15.85%
412,423,868
33,910,511
29,267,673
17,507,185
493,109,237
446,334,379
46,774,859
110.48%
17.26%
462,813,314
33,236,891
30,787,734
13,395,460
540,233,399
496,050,205
44,183,194
108.91%
16.18%
521,105,784
33,425,310
31,188,891
13,640,598
599,360,583
554,531,094
44,829,489
108.08%
16.30%
572,845,432
37,295,095
30,089,990
15,047,839
655,278,356
610,140,526
45,137,829
107.40%
16.28%
617,282,343
35,749,816
31,854,045
17,003,874
701,890,077
653,032,159
48,857,919
107.48%
17.44%
Line 2 of Section 2 shows changes in the overnight position needed to balance the cash flow
mismatches. As Section 3, Line 2 of Figure 7 indicates, cumulative changes to the overnight position
match the cumulative cash flow deficit numbers in the previous paragraph. However, because Non-Core
term funding is rolling off the books even faster than the overnight position is changing, unused borrowing
capacity (Section 2, Line 3) grows from $17.26 million to $31.854 million by the end of the forecast.
Unused borrowing capacity should take into account two factors:

Policy limits on use of Non-Core Funding both at the individual source level and overall

Actual unused borrowing capacity with the various funding providers
For the purpose of these projections, sufficient unused capacity is assumed at the various sources to
allow XYZ to reach its overall policy limit of 40% of funding all through the stress scenario. Should that not
be the case, Figure 7 may overstate XYZ’s unused borrowing capacity.
Available HLUM securities fail to grow, due to the elimination of Fed Funds Sold and due to the fact no
additional investments are being purchased after the first quarter in the stress scenario. The total liquidity
gap, including unused borrowing capacity, grows from $37.25 million to $48.9 million by the end of the
three-year forecast. Because assets shrink throughout the forecast, the cumulative liquidity gap/asset
ratio grows from 12.51% at the end of the first quarter to 17.44% by the end of the three-year forecast.
The one-year stressed cumulative liquidity gap/asset ratio is 14.92%, well above green light minimum of
5%. Of course to the extent unused borrowing capacity falls below the policy limit of 40%, the stressed 1
year cumulative liquidity gap/asset ratio will also drop. For example should overall borrowing capacity
drop to 30% of assets, the 1 year stressed cumulative liquidity gap/asset ratio would be 4.92%, just below
the 5% green light minimum.
Given these stress test results, the XYZ Liquidity policy limits require no action as long as XYZ has
access to $33 million of overnight borrowings to make up for daily funding shortfalls. These overnight
funds are unlikely to be available from either the FHLB (collateralized source) or from XYZ
uncollateralized sources once they have fallen below PCA well capitalized minimums. Management will
need a CFP to address this shortfall and any others they have encountered in their stress testing. The
following describes the series of actions XYZ would take in dealing with this stress event as it unfolds.
ABA Toolbox on Liquidity – Appendix A | 11
Event
Triggers indicate development of asset
quality problem, declines in performance,
and potential for a capital failure event.
PCA Well Capitalized failures or regulatory
actions remove access to brokered CD
network. FHLB increases collateral haircuts.
Action
1.
Replace maturing brokered CDs with FHLB
advances or similar instruments that have
maturities of at least 2-3 years.
2.
Begin moving jumbo CDs into CDARS
network to provide full deposit insurance to
those depositors to reduce potential runoff
and reduce collateral pledging requirements,
freeing up asset-based liquidity.
3.
Use Core Funding strategies to grow
deposits, replacing non-regulatory Core
Funding as it matures.
4.
All maturing investments held in fed funds or
short-term investments.
5.
Loan originations cut back.
6.
Begin shrinking the balance sheet to build
capital and liquidity using net loan cash
flows to pay off maturing funding.
1.
Replace renewing brokered CDs and FHLB
Advances with Rate Board CDs to the extent
needed to fund the balance sheet. Extend
terms to 2-3 years.
2.
Make further cutbacks in loan originations
and potentially liquidate asset-based liquidity
to shrink the balance sheet.
3.
Package and sell conforming consumer
mortgages in the secondary market.
4.
Explore the sale of business lines or
branches to further shrink the balance sheet.
1.
Consider further cutbacks in lending to level
needed to sustain key customer
relationships. Objective is to allow deposit
runoff through shrinkage.
2.
Begin using the Fed Window as a
collateralized borrowing source to plug any
remaining funding gaps.
Adverse publicity causes loss of Core Funding
Fortunately, XYZ management has already incorporated key portions of the CFP for the Capital Failure
Scenario: reductions in investment purchases, some use of asset-based liquidity (Fed Funds Sold),
reductions in loan originations, and balance sheet shrinkage. Therefore, XYZ should be able to survive
the Capital Failure Scenario for 2-3 years, by closing the $33 million funding gap with some combination
of CDARS, Core Funding growth, rate board CDs, and collateralized fed borrowings.
XYZ Economic Recovery Scenario
The final stress event identified by XYZ management is an economic recovery scenario - a high
probability high impact event. Because it is high probability it is best dealt with in the base liquidity
ABA Toolbox on Liquidity – Appendix A | 12
strategy rather than with stress testing. The scenario and its potential effects are described in the XYZ
Base Liquidity Plan. The business plan anticipates that growth will turn positive in Year 3, but it only looks
out three years and never reaches the equilibrium forecast in the fifth year of the capital plan. A stress
test is unnecessary; should loan growth exceed deposit growth, the effect will immediately begin to show
up in XYZ’s trigger ratios.





To the extent loan growth is funded from reductions in investments, the LCR would begin
declining, eventually breaking through barriers between green and yellow, alerting management
to the threat. The threat level guidelines prescribe changes to the business strategy to counter
these threats.
A similar movement would occur to the NSFR, with the ratio breaking the green/yellow barrier,
and ultimately the yellow/red barrier. Again, the threat level guidelines prescribe changes to the
business strategy to counter these threats.
The cumulative one-year liquidity gap/asset ratio would begin moving downward, showing the use
of liquidity to fund loan growth, eventually breaking through the green/yellow barrier and alerting
management.
Individual funding sources would begin moving in the direction of limits, and overall use of NearCore and Non-Core Funding would begin moving up away from its goal and in the direction of the
policy limit, alerting management to liquidity issues
Depending on the relationship between the loan growth rate and the capital growth rate, capital
ratios could begin to decline, falling below capital goals which would also alert management of an
issue.
Should loan growth exceed core funding growth to the extent that it is felt a liquidity or capital threat is
developing, the following contingency actions would be considered.
Event
Declines in LCR with the potential of falling to
a higher threat level barrier
Declines in NSFR with the potential of falling to
a higher threat level barrier
Declines in the unstressed cumulative liquidity
gap/asset ratio with the potential of falling to a
higher threat level barrier
Increases in individual borrowing category
ratios/assets or overall Near-core and Non-Core
Funding/assets with the potential of violating policy
limits or using funds needed for contingencies
Declines in the capital/asset ratio to management
threat level points or with the potential to fall
below PCA well capitalized minimums
Action
A portion of loan production formerly retained is
sold in the secondary markets
Pricing and/or increased underwriting standards
are used to reduce loan demand
In severe situations, loan originations are limited
to those necessary to maintain key customer
relationships
A portion of the loan portfolio is packaged and
sold or participated
Funding growth, but only to the extent that faster
overall asset growth does not represent a threat
to the overall capital ratio
ABA Toolbox on Liquidity – Appendix A | 13