Liquidity Action Plan (LAP)
A LAP will be activated following a prescribed set of triggers. The severity and duration of the liquidity event will be characterized by the presence of stresses. A level 1 event is deemed to be normal in nature. They arise from day-to-day operations of the Credit Union and are handled through normal business channels. A level 2 event reflects deeper stresses with broader cyclical trends of greater magnitude. These triggers may not in and of themselves represent serious issues but when considered in totality gives rise to notable and negative emerging trends. A level 3 event represents serious, profound and time-critical stresses requiring immediate attention.
Stress Level 1: Ordinary Course of Business
Level 1A – Normal Course of Business
•All liquidity guidelines as set forth in the Financial Management Policy (FMP) are being met or exceeded;
•All cash flow guidelines as set forth within the cash flow report are being met or exceeded;
•As described in this Section of the FMP, all monthly reports tracking the status of the early warning indicators are prepared and presented to the Finance Committee on a quarterly basis; and
•Plan updates and modifications are made as needed.
Level 1B – Normal Course of Business with Heightened Liquidity Concerns
•One or more of the early warning indicators described in this section of the FMP is triggered;
•One or more of the cash flow guidelines are not being met;
•One or more of the liquidity guidelines set forth in the FMP are not being met; and
•As determined by the Finance Committee or a member of the Senior Management Team at any time they deem appropriate.
If a Level 1B situation is triggered, a review of the Credit Union’s current and projected liquidity risk is required. This review shall include an assessment of the possibility that a funding crisis might develop and an assessment of the Credit Union’s ability to meet a range of funding crises of varying severity and duration. Specific quantitative estimates of liquidity needs and potentially available primary and secondary liquidity shall be included in the assessment.
Stress Level 2: Possible or Future Liquidity Crisis
Level 2A – Above Normal Probability of Potential Crisis
The following actions will be taken during Level 2A conditions:
Senior Management shall prepare and the Finance Committee shall review a cash flow projection report at least bi-monthly;
A liquidity summary report will be presented to the Board of Directors at its monthly meeting;
The Credit Union’s borrowing capacity at the FHLB and the Fed’s Discount Window could be fully utilized through the prudent use of collateral;
The Senior Management Team shall review loan commitments;
An evaluation of the use of all secondary funding sources, including a recommended prioritization of the use of available funds based on collateral availability, rates, amounts and timeliness of execution will be prepared by the SVPCFO; and
Maturing wholesale funding will be evaluated for extension for terms and rates as specified by the Finance Committee.
Level 2B: Probable Future Liquidity Problem
The following actions will be taken during Level 2B conditions:
•A Liquidity Crisis Management Team (LCMT) will be formed comprised of the Senior Management Team. Board members of the Finance Committee will participate as members in LCMT meetings/decisions as schedules permit;
•The LCMT shall prepare a thorough analysis of prevailing conditions, current liquidity, the estimated probability of a liquidity crisis and projections of liquidity levels for a range of possible crisis levels of varying severity and duration. Specific quantitative estimates of liquidity sources and uses will be presented as part of the analysis;
•The President/CEO will brief directors and regulatory authorities on the Credit Union’s liquidity condition and steps being undertaken to correct the condition;
•The LCMT will authorize all internal and external communications including any measures to deal with rumors. The President/CEO or his designee will have sole responsibility for any written or oral communications with depositors, regulatory authorities, lenders, members, representatives of the media and employees;
•All liquidity reports will be prepared and updated as often as the LCMT deems appropriate; The LCMT shall approve quantitative targets and timelines for achieving a liquidity level within FMP guidelines;
•The LCMT shall direct other members of management to assist in building contingent liquidity. In doing so, the LCMT will identify and implement loan, investment, deposit and borrowing strategies aimed at preserving/increasing the Credit Union’s liquidity position; and
•The LCMT will develop policies, procedures and tactics that may be needed in the event that conditions deteriorate to Stress Level 3, including a plan to ensure that the branches maintain sufficient cash to meet deposit outflows.
Stress Level 3: Actual Liquidity Crisis
The LCMT shall initiate Level 3 measures whenever it appears that the confidence of funds providers is falling, whenever the Credit Union experiences difficulty in obtaining sufficient funds to meet its obligations, or when capital markets or payment systems conditions appear to be detrimental to the safe and sound operation of the Credit Union. In addition to the actions specified for Level 2B conditions, the following actions shall be taken during Level 3 conditions:
•The LCMT shall meet at least on a weekly basis;
•Liquidity reports will be prepared for all LCMT meetings;
•Directors and regulatory authorities shall be kept closely informed of current and projected liquidity risk;
•Progress reports on the status of improvements in achieving liquidity levels in compliance with the FMP and cash flow guidelines will be presented at each LCMT meeting;
•Written tactical plans setting forth specific to meet or exceed liquidity targets will be approved by the Board of Directors;
•The President/CEO will brief directors and regulatory authorities on the Credit Union’s liquidity condition and steps being undertaken to correct the condition;
•The LCMT will authorize all internal and external communications including any measures to deal with rumors. The President/CEO or his designee will have sole responsibility for any written or oral communications with depositors, regulatory authorities, lenders, members, representatives of the media and employees;
•Stabilize liquidity transitioning to normalcy;
•Reforecast; and
•Post-Mortem review and adjust communications as needed.