Liquidity Forecasting & Stress Testing

What is Liquidity Forecasting & Stress Testing?

ALM First Analytics believes the need to manage liquidity risks effectively is critical, making funds management, forecasting cash flows, and contingency funding plans, as well as building a sound liquidity framework, more important than ever. Depositories need to identify plausible stress events that could hinder the institution’s ability to meet short and long-term obligations. Your institution must understand the impact that an event negatively affecting your liquidity, earnings, or capital base, whether external or institution-specific, has on the balance sheet.

Validation Opportunities with ALM First Analytics

ALM First Analytics performs liquidity analyses as an ancillary service to help your institution predict, and prepare for, changes in the liquidity position over the coming months. Our team of experts analyzes how projected growth, purchases, and sales affect liquidity. We assist in monitoring primary and secondary sources and uses, identifying alternative liquidity sources, measuring forecasted ratios, and meeting regulatory requirements.

Key components include:

      • Evaluation of current liquidity measurement and management processes
      • Review of current liquidity risk and contingency planning processes
      • Assessment of liquidity and funds management policies

Robust Modeling

Our complex model captures optionality to accurately project cash flows of all loans and investments.

Unbiased Strategic Consulting
We focus on strategic positioning to improve institutional performance and profitability while minimizing risk.

We provide assistance with basic liquidity reporting and stress testing, to adjusting internal policies and developing liquidity framework. 

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The Importance of Liquidity Forecasting & Stress Testing

    ALM First Analytics works closely with your institution to ensure operational and regulatory needs are met. With ALM First Analytics, your institution can:

    • Recognize the key components of a successful analysis
    • Identify plausible stress events that could hinder the institution’s ability to meet short and long-term obligations
    • Understand the impact that an event negatively affecting its liquidity, earnings, or capital base, whether external or institution-specific, has on its balance sheet
    • Maintain a sound Contingency Funding Plan (CFP)
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    Why measure liquidity?

    Profitability across the financial industry has stabilized since the financial crisis, but net interest margins can still be low, and the opportunity to increase earnings by facilitating loan growth is often too strong to resist. Depositor behavior for traditionally inelastic retail deposits has forced management teams to seek alternatives to support asset growth, some more unstable than others. One way to determine an adequate liquidity buffer is by running cash flow analyses. The goal is for these analyses to reflect an institution and its funding structure. Additionally, liquidity forecasting incorporates forward looking assumptions and parameters to effectively build around actual contingent events, and plans to remedy such events.

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    What is Liquidity Policy Architecture?

    Liquidity Policy Architecture establishes liquidity procedures and measurements. It states what will be monitored and with what frequency. For example, the cash management sheet will be monitored daily, while Total Loans/Total Assets will be monitored monthly on a low-medium-high risk scale. Additionally, alternative liquidity sources should be identified, such as permissible methods of asset liquidation, FHLB borrowings, and the Federal Reserve discount window.

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    What is a Contingency Funding Plan?

    A Contingency Funding Plan (CFP) describes a broad range of possible funding crisis scenarios that may arise. It explains the responses needed to handle each situation, establishing clear lines of responsibility. Depositories have multiple outlets to obtain liquidity in times of financial harmony. Under periods of stress, though, the tenor of that sentiment changes substantially. The CFP provides a review of the resources available to the institution, which assures short-term funding needs can be met. Clear delineation of contingency funding scenarios should be made, outlining implementation and escalation procedures. Best practice for CFPs includes identifying and regularly monitoring early warning indicators.

    Get Started Now

    Contact us today to discuss the importance of Liquidity Forecasting & Stress Testing for your balance sheet.

    All investing is subject to risk, including the possible loss of the money you invest.

    “ALM First” is a brand name for a financial services business conducted by ALM First Group, LLC (“ALM First”) through its wholly owned subsidiaries: ALM First Financial Advisors, LLC (“ALM First Financial Advisors”); ALM First Advisors, LLC (“ALM First Advisors”); and ALM First Analytics, LLC (“ALM First Analytics”).  Investment advisory services are offered through ALM First Financial Advisors, an SEC registered investment adviser with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training.  Moreover, ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. You are encouraged to read these documents carefully. Balance sheet advisory services are offered through ALM First Advisors.  Financial reporting services, loan introduction services, and other special project services are offered through ALM First Analytics.  Neither ALM First nor any of its subsidiaries provide legal, tax, or accounting advice. This firm is not a CPA Firm.