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Regulatory Focus on Liquidity

When examiners conduct an examination, they do a preliminary screening of financial data to see if any issues are readily apparent. This screening will produce an analysis of the liquidity a bank currently has but not necessarily what the bank’s future liquidity needs might be. One means for evaluating the current position is to look at three measures referred to as dependency ratios. These measures assist in understanding the mismatch of funding the balance sheet’s long-term asset base with various types of short-term or non-core liabilities.

The first ratio, Volatile Liability Dependence %, measures the relationship between long-term earning assets and net short-term funds. Long-term earning assets are considered to be investment securities which mature beyond one year and all loans. Net short-term funds are large time deposits, foreign office deposits, fed funds purchased, repurchase agreements, and other borrowings maturing within one year, net of short-term investments. As a snapshot measure, this ratio signifies the existing reliance on volatile sources to fund the bank’s long-term asset base. It also indicates the level to which the bank may have already tapped these more readily available funding sources, therefore, limiting their ability to do so in the future.

The second ratio, Non-Core Funding Dependence %, is a further refinement for measuring the bank’s current position by adjusting the volatile liability base to include additional sources considered to be "non-core". Added to the volatile liability base as defined above are brokered deposits less than $100K and demand notes issued to the U.S. Treasury. This ratio measures the reliance on funding the bank with all non-core sources, although all of these are not considered to be purchased or wholesale because of their size (brokered less than $100K) or their nature (U.S. Treasury demand deposits).

The third ratio, Short-Term Non-Core Funding Dependence %, evaluates the short-term , non-core portion as it relates to funding long-term earning assets. This ratio includes all of the same funding categories included in the non-core ratio, but includes only those deposits that mature within one year. This indicator again refines the above measure to further pinpoint the funding of long-term earning assets with non-core, volatile sources of a short-term nature.

Obviously, these three measures do not completely communicate any bank’s total liquidity risk position, but they do quickly convey a glimpse of the institution’s current and potential future mismatch between funding sources and asset utilization.

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