Deposit Run, HTM Losses, and the Contingency Funding Plan
Summit Bank ($9.8 billion assets) holds $7.1 billion of deposits, 31% uninsured, and $1.3 billion of high-quality liquid assets (HQLA). Its LCR is 112% and NSFR 105%. It also holds $2.6 billion of held-to-maturity (HTM) municipal and agency securities with a $290 million unrealized loss, equal to 22% of CET1. Brokered CDs of $850 million mature within 90 days, and the bank assumes 80% will roll over. In the past five business days, deposits fell $620 million after a large local employer announced layoffs and a competitor began offering 5.1% CDs. The contingency funding plan lists the central bank discount window, but the bank has not pledged collateral. It has $1.1 billion of unpledged agency MBS. The CFO proposes selling $400 million of HTM securities, which would realize a $60 million loss. The ALCO asks whether to sell securities, borrow, or pledge collateral, and how to report the position.
1. Assess the liquidity stress. Recalculate a simple LCR proxy after the outflow and evaluate the brokered CD rollover assumption.
Read the worked answer
Current net outflows implied by the LCR are $1.3bn / 1.12 = $1.161bn. Adding the $620m deposit outflow gives net outflows of $1.781bn and an LCR proxy of 1.3 / 1.781 = 73%. If 20% of the $850m brokered CDs run off, that adds $170m, bringing net outflows to $1.951bn and the proxy to 67%. Even if some of the $620m is already captured in the 30-day bucket, the direction is clear: the bank is below 100% on a stressed basis.
The 80% rollover assumption is optimistic given the layoff announcement and a 5.1% competitor CD. Uninsured deposits are 31% of $7.1bn, or about $2.2bn, and are more flight-prone. HQLA composition also matters because Level 2 assets are subject to caps and haircuts. The ALCO should activate the contingency funding plan immediately and run a seven-day and 30-day stress with higher uninsured runoff and no brokered rollover.
2. Evaluate the HTM sale. What are the accounting, capital, and franchise consequences, and what alternatives exist?
Read the worked answer
Selling $400m of HTM securities at a $60m loss reduces CET1 by about 4.5% of the $1.318bn CET1 implied by the $290m loss being 22% of CET1. More importantly, a sale before maturity may call into question the bank's intent and ability to hold the remaining HTM portfolio to maturity. If the remaining $2.2bn must be reclassified, the remaining unrealized loss of roughly $230m could hit OCI or equity, which is far larger than the $60m realized loss.
Alternatives should be used first: pledge the $1.1bn of unpledged agency MBS to the discount window or repo, borrow through secured facilities, use securities lending, issue CDs at market rates, draw committed lines, or sell shorter-duration available-for-sale assets. A liquidity-driven HTM sale should be documented as a last resort and discussed with the supervisor and auditors. The bank should not sell HTM simply to avoid pledging collateral.
3. What IRRBB and reporting actions should ALCO take, and how should the bank communicate with the supervisor?
Read the worked answer
ALCO should update the interest rate risk profile: economic value of equity and net interest income sensitivity, deposit beta assumptions, and the duration of the HTM portfolio. A $290m unrealized loss equal to 22% of CET1 indicates significant rate risk, so the bank should consider hedging with swaps, extending liability duration, and reducing asset duration. It should stress deposit runoff and higher rates together, not separately.
Reporting should include a daily liquidity dashboard, weekly ALCO reporting, updated LCR and NSFR projections, and contingency funding plan triggers. The bank should notify the supervisor promptly of material deterioration, especially if the stressed LCR falls below 100%, and should update its capital and liquidity plans. Board minutes should record the stress results and the decision to pledge collateral rather than sell HTM. Communication should be factual, include remediation steps, and avoid presenting the 80% rollover assumption as a base case without sensitivity analysis.