FDIC issues liquidity guidance and encourages contingency funding

The US regulator has released recommendations on liquidity risk and encourages capital-raising initiatives as US banks feel the pinch

WASHINGTON, DC – US regulator the Federal Deposit Insurance Corporation (FDIC) has issued guidance on liquidity risk. The regulator says its recommendations are in response to the market turmoil, focusing on the risk of illiquidity within off-balance sheet exposures. Its capital adequacy recommendations cover capital-raising initiatives and contingency funding plans.

The regulator says: “Liquidity risk measurement and management systems should reflect an institution's complexity, risk profile and scope of operations. Institutions that use wholesale funding, securitisations, brokered deposits and other high-rate funding strategies should ensure their contingency funding plans address relevant stress events.”

The FDIC’s guidelines come as market commentators speculate on the possible failure of another large US bank, in the wake of the Bear Stearns buyout last March, and banks’ likely heavy risk exposures to ailing government-sponsored enterprises Fannie Mae and Freddie Mac – rumoured to be on the brink of further government intervention.