Liquidity Policy

Because liquidity is such a crucial matter for banks, there should be board-approved policies in place to manage liquidity positions. The goal of the policies is to manage the bank’s funds so that obligations may be met as they come due and without incurring unacceptable costs or losses.

Aspects of liquidity might be sprinkled throughout more than one policy. Besides a liquidity policy, there might be an investment policy or an asset/liability policy, or all three. These policies address topics such as the structure of the balance sheet, pricing, marketing, contingency funding plans and management reporting on compliance with the policies. This ensures that you, as a director, are aware of your bank’s liquidity position and its consistency with policy. It’s also important that reviews of reports and discussions of issues identified from them are recorded in the board’s minutes.

Regardless of which policy contains your liquidity provisions, some of the major areas to cover include:

  • guidelines delineating appropriate levels of liquidity, which can be done through limits on the loan-to-deposit and loan-to-capital ratios, for example;
  • limits on the relationship between anticipated funding needs and available sources for meeting those needs;
  • appropriate sources for meeting funding needs, on both the asset side of the balance sheet and the liability side;
  • permissible investments to meet liquidity needs;
  • liquidity plans for emergency situations, known as contingency planning; and
  • limits on the dependence on individual customers or market segments for funds.

These are just a sampling of what should go into your policy. Be sure to check out the Learn More and Try This features related to liquidity policy for more information. There is also a Learn More feature for an investment policy, as investments play a key role in a bank’s liquidity.