Concentrated Municipal Deposits and a Promotional CD Proposal
Meridian Community Bank has $1.2 billion in deposits. Twelve municipal, escrow, and settlement accounts make up 38% of deposits; 42% of total deposits are uninsured or non-operational. Wholesale funding is 25% of liabilities, including $150 million of brokered CDs maturing within 60 days. HQLA is $216 million against 30-day net outflows of $200 million, giving an LCR of 108%. NSFR is 104%. About 70% of HQLA is Level 2A securities. A rating downgrade of two large municipal depositors is expected next week, and the treasurer estimates 25% of uninsured deposits could leave within 30 days if headlines worsen. The board wants to pay 15 basis points above market on a 12-month promotional CD to raise $80 million and use proceeds to reduce the brokered CD book.
1. Calculate the stressed LCR using the treasurer's outflow estimate and assess the buffer.
Read the worked answer
Uninsured or non-operational deposits are 42% of $1.2bn = $504m. A 25% outflow is $126m. Add that to the existing 30-day net outflows of $200m, giving stressed outflows of $326m. Stressed LCR = $216m HQLA / $326m = 66%, well below 100%. The buffer shortfall to 100% is about $110m of HQLA or an equivalent reduction in outflows. The LCR also depends on HQLA quality: 70% of the buffer is Level 2A, so a valuation shock or a change in haircuts could reduce effective HQLA further. The concentration is the real vulnerability: twelve municipal, escrow and settlement accounts are 38% of deposits, and a rating downgrade of two large depositors could trigger simultaneous withdrawals and headlines. The 108% reported LCR is not a comfortable buffer in this scenario; it is thin and concentrated. Board reporting should show both the reported and stressed LCR, the assumed outflow rates, and the survival horizon.
2. Evaluate the promotional CD proposal from a liquidity and interest-rate-risk perspective.
Read the worked answer
The $80m promotional CD would raise liabilities, not create high-quality liquid assets, unless the proceeds are held as cash or eligible securities. Using the proceeds to reduce brokered CDs may improve the funding mix and NSFR slightly, but it does not close the $110m stressed LCR shortfall. A 12-month CD at 15 basis points above market is rate-sensitive money; it may cannibalize existing deposits, attract depositors who will leave at maturity, and signal stress to the market. It also creates interest-rate risk: if rates fall, the bank is locked into above-market funding for a year; if rates rise, the depositors may reprice or leave. The proposal should not be presented as a solution to the municipal concentration. A better approach is to combine targeted retail and small-business deposit campaigns with secured wholesale funding and contingency lines, while extending maturities where possible. If the board approves the promotion, cap its size, monitor cannibalization and retention, and treat it as a tactical funding action, not a core liquidity fix.
3. Recommend contingency funding plan actions and board reporting.
Read the worked answer
Activate the contingency funding plan triggers now, before the downgrade. Notify the board risk committee, open a dialogue with the regulator, and confirm available secured borrowing capacity, including central-bank and Federal Home Loan Bank-type facilities. Build a 30-day cash-flow forecast by depositor and maturity, identify the municipal accounts most at risk, and assign relationship managers to contact them with a coordinated message. Extend or diversify brokered CD maturities, but do not rely on a single promotional product. Increase HQLA by selling less liquid securities or drawing available lines, and set a minimum stressed LCR of 100% with an early-warning trigger at 110%. Limit deposit concentration by sector and depositor, and add a board-level limit on uninsured and municipal deposits. Report weekly on stressed LCR, NSFR, uninsured deposit outflow, collateral availability, wholesale maturity ladder, and the status of contingency lines. Document the assumptions and escalation path so the board can act quickly if the downgrade occurs.