Publications & Resources
January/February 2009
Focus: Funding & Liquidity
Staying Liquid in a Time Regulatory Sea Change
By Richard M. Riccobono
These days, a perceived lack of liquidity might be best
exemplified by the customer who steps up to the ATM to make a withdrawal. As the
display reads "insufficient funds," the customer may not be sure if the words
apply to him or to the bank!
In a world where perception is everything, it is critical
that your investors, depositors and regulators believe in your ability to
quickly generate cash in any number of situations - not the least of which could
be an unexpected deposit runoff or the inability to attract new deposits. In
fact, a perceived lack of liquidity has been known to torpedo even a perfectly
solvent institution.
The legislative and regulatory actions of the past few
months have steered many banks away from the dangerous shoals of illiquidity -
both actual and perceived. Nonetheless, the full ripple effects of the Housing
and Economic Recovery Act of 2008, the FDIC's Temporary Liquidity Guarantee
Program, the Emergency Economic Stabilization Act of 2008, including the TARP
Capital Purchase Program, and others, have yet to be fully realized. Among the
questions that they have raised:
- Will recent regulatory actions directly or indirectly impact the banking industry's ability to raise funds at competitive levels in the wholesale markets?
- Will the new insurance on money market funds impinge upon bank liquidity?
- What are the prospects for longer-term government support of the overall GSE model, and what might this mean for access to wholesale funding?
- Are there new business opportunities for the banking industry as a result of these regulatory developments?
With the Temporary Liquidity Guarantee Program, the FDIC
now guarantees a bank's non-interest demand deposit accounts and senior
unsecured debt. This program has certainly enhanced the perception that
financial institutions will be able to retain deposits and raise new funds.
Similarly, the FDIC's guarantee of bank holding company loans enhances the
liquidity of small banks.
The TARP Capital Purchase Program enables banks to raise
incremental capital at a reasonable cost. This should strengthen bank balance
sheets because, in all likelihood, a portion of these proceeds will be used to
acquire liquid assets that can be pledged as collateral for sources of wholesale
funding.
In the "don't worry, it's only a temporary condition"
category, many are focused on the impact of the $50 billion in available U.S.
Treasury guarantees of publicly offered U.S. money market funds, as authorized
under the 1934 Exchange Stabilization Act of 1934. As of the date of this
writing, the Treasury has the ability to extend this program through September
18, 2009. For community banks, which have traditionally viewed brokerage firm
money market accounts as a great potential source of new deposits and liquidity,
the guarantee on money market funds, albeit temporary, could reduce the
potential flow of new deposits from this source. Banks might consider renaming
their money market deposit accounts to avoid confusing them with money market
funds industry, which has on more than one recent occasion "broken the buck."
Perhaps MMDAs should be re-branded as "Capital Preservation DDAs"?!
In the midst of the current systemic liquidity crisis,
institutional market support mechanisms such as the Federal Home Loan Banks have
remained dependable sources of wholesale funding and contingent liquidity. The
next few months will likely see a full review of the financial system's deposit
guarantee and wholesale funding infrastructure, including the role of the GSEs.
We will soon see how much longer temporary guarantees on non-maturity deposits,
unsecured debt and money market funds will last. We'll likely get greater
clarity on the levels of explicit and implicit guarantees of the GSEs by the
Once we've steered the ship back to safe waters and
restored confidence in our financial system, the nation's housing GSEs,
including the Federal Home Loan Banks, and state housing agencies, should play a
key role in returning the financial sector to a "peacetime" condition..
For now, community and regional banks have ready access to
liquidity. Still, the recent, unprecedented actions that have increased insured
deposit limits and enabled guarantees of unsecured debt have sunset clauses with
durations that remain in question. Now is the time to ensure that you have fully
developed and modeled your liquidity contingency plans and that you are equipped
to navigate through all kinds of waters - including our recent "perfect storm."
Richard M.
Riccobono is president & CEO of the Federal Home Loan Bank of
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