ABA Banking Journal - November 2009 - (Page 12)
Community Banking Pass the Aspirin: Handling FDIC’s proposed pre-paid premium plan p. 16 Not James Stewart? a liquidity plan Devising a liquidity contingency plan now, rather than when a challenge hits, helps ensure you continue to have a wonderful banking life Then you need I n the movie, “It’s a Wonderful Life,” George Bailey, building and loan executive, solves a liquidity crisis with an impassioned speech to depositors about the role of the local bank in the community. Deposits aren’t sitting in the vault, he tells the gathered savers. They’re in this house, and that development, and so forth. Bailey, as played by James Stewart, makes his case, and all but one grump return their deposits. Liquidity crisis averted. In real life, liquidity contingencies have to be solved by preplanning and forethought, not clever oratory. Liquidity’s evolution Prior to Autumn 2008, the 2000s had been a prosperous decade for the nation’s financial institutions. There were loans to be made By Brian J. Blaha, CPA, partner, Wipfli LLP, Milwaukee, Wis., email@example.com, with contributions from Marc Lambrecht and Michelle Huempfner on every street corner. Communities were undergoing expansions and financial institution customers were looking for every avenue to enhance and leverage investments in those projects. To handle this growth, many banks needed to leverage their own balance sheets. They chose non-core capital options, including trust preferred, subordinated debt, and holding company loans. Such capital structure leveraging has had a major impact on the health of balance sheets and liquidity management. Many institutions shifted from the asset-based liquidity strategies of the past to liability-based funding strategies. They used a combination of FHLB advances and other borrowings, brokered deposits, and internet CDs not only as core funding sources but also as a backstop, should emergency funds become necessary. Such techniques were previously used solely as liquidity sources of last resort. As they were used to leverage the balance sheet, a new set of issues has emerged regarding balance sheet management. Therein lie the reasons the regulators have called for enhanced liquidity risk management through two Subscribe at www.ababj.com 12 NOVEMBER 2009/ABA BANKING JOURNAL
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