Risk Management & Analytics: Community banks face rise of liquidity risk, FDIC warns

Community banks face rise of liquidity risk, FDIC warns

In 2017, the FDIC released a paper, Community Bank Liquidity Risk: Trends and Observations from Recent Examinations, which outlines key challenges facing community banks and attempts to raise awareness on liquidity issues facing banks.

For institutions with assets of less than $10 billion, the paper suggests that liquidity risk is on the rise and that funding issues are contributing to risk. A historical representation of liquid holdings and wholesale sources shows that liquid asset holdings at community/small banks have begun to decrease. While these holdings are not at pre-recession levels, they present a potential concern about whether adequate cushions are in place.

The paper further discusses the health and stability of a bank’s core deposit base, which ultimately serves as a primary source of funding at smaller institutions. When an institution faces challenges with funding from core deposits, it may turn to wholesales sources, which are typically more costly and less stable. The FDIC paper notes that in recent years many institutions have diversified their funding sources to include wholesale as part of their liquidity risk management strategy. However, the FDIC warns that overreliance on these sources poses a risk, especially if an institution faces financial stress. Since these funding sources must adhere to legal, regulatory and counterparty requirements, they are considered to be less stable if capital holdings deteriorate.

For community banks and institutions with less than $10 billion in assets, the FDIC paper provides useful data, graphs, charts and details that outline overall trends for declining liquid asset levels. It additionally outlines specific funding considerations and reminds institutions of restrictions under the FDI Act to ensure banks are confronting potential liquidity triggers head on. To get a detailed view of liquidity risk trends outlined by the FDIC, we encourage leaders of community banks to read the paper.

Are you looking for more information on liquidity risk management? In the coming weeks, MountainView Financial Solutions, a Situs company, will release several practical e-books designed to help smaller institutions understand, measure and manage liquidity risk.


FDIC poised to revamp deposit rules. Banks say it’s about time

Community bankers are hopeful that the Federal Deposit Insurance Corp. (FDIC) will soon deliver long-awaited reforms of how it defines high-rate deposits.

The FDIC plans to solicit comment on revamping how it determines that a deposit is brokered. The change could have huge implications for banks that are less than “well-capitalized” that face restrictions on accepting new brokered deposits, among other things.

But bankers are also eager for the agency to change its methodology for setting interest rate caps for certain banks on all of their deposits. Those caps, which also apply to banks that are less than well-capitalized, are meant to prevent banks from avoiding the brokered-funds restrictions by offering above-market yields.

Read more: American Banker


ETF investors are rewriting the rules for interest rate hedging

Investors are coming up with new ways to hedge credit risk as interest rates rise and the Federal Reserve appears to be on course for further tightening.

Amid a steep run-up in Treasury yields and the longest selloff in the S&P 500 Index since the 2016 election, traders are largely avoiding risk. But they’re ignoring the traditional yin-yang relationship between defensive and cyclical stocks, as well as between longer- and shorter-dated Treasury bonds.

Instead, many have taken more ambiguous routes to safety. Some have piled into utilities and long-duration Treasury hedges. Others bulked up their exposure to rate-sensitive banks and moved toward the ultra-short end of the yield curve. And a chunk did a bit of both.

For Ben Mandel, global strategist for JPMorgan Asset Management, the key question facing investors now is how far to lean into risk in multi-asset portfolios while also positioning for the inevitable challenges that come in the later stages of a market cycle. In a recent Bank of America survey, a record 85 percent of fund managers described the global economy as late cycle.

Read more: Bloomberg


Banks will not be forced to reveal climate change risks they face

The Bank of England has stopped short of forcing financial companies to disclose the potential risks they face from climate change, despite growing calls from campaigners for such action.

In a warning to finance firms to vastly improve their planning to safeguard against the financial risks posed by global warming, Threadneedle Street asked companies to “consider the relevance” of disclosing their climate-related risks.

The central bank’s Prudential Regulation Authority (PRA), which is tasked with ensuring UK financial sector stability, launched the guidelines for consultation on Monday, in a package of measures designed to coax banks to prepare for the low-carbon economy of the future.

The Bank has previously said that only 10% of banks take a long-term view of the risks posed by climate change, while Mark Carney, its governor, has said that failure to adapt would have a “catastrophic impact” on the financial system.

The guidelines also come after the UN Intergovernmental Panel on Climate Change warned that failure to limit global warming to within a maximum of 34.7F over the next dozen years would significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people.

Read more: The Guardian


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