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Director's Corner

San Francisco Region Director's College Computer- Based Training
Liquidity

Rating Liquidity
The following is an excerpt from the Uniform Financial Institutions Ratings System. Take a few minutes to read the ratings guide and rate the liquidity component for First State Bank.

 Uniform Financial Institution Ratings System
In evaluating a bank's liquidity position, consideration should be given to the current level and prospective sources of liquidity compared to funding needs, as well as to the adequacy of funds management practices relative to the institution's size, complexity, and risk profile. In addition, funds management practices should ensure that liquidity is not maintained at a high cost, or through undue reliance on funding sources that may not be available in times of financial stress or adverse changes in market conditions.

Liquidity is rated based upon, but not limited to, an assessment of the following evaluation factors:

  • The adequacy of liquidity sources compared to present and future needs
  • The availability of assets readily convertible to cash without undue loss
  • Access to money markets and other sources of funding
  • The level of diversification of funding sources
  • The degree of reliance on short-term, volatile sources of funds, including borrowings and brokered deposits, to fund longer-term assets
  • The trend and stability of deposits
  • Management's ability to identify, measure, monitor, and control the institution's liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans

Ratings

  1. A rating of "1" indicates strong liquidity levels and well-developed funds management practices. The institution has reliable access to sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs.


  2. A rating of "2" indicates satisfactory liquidity levels and funds management practices. The institution has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs. Modest weaknesses may be evident in funds management practices.


  3. A rating of "3" indicates liquidity levels or funds management practices in need of improvement. Institutions rated "3" may lack ready access to funds on reasonable terms or may evidence significant weaknesses in funds management practices.


  4. A rating of "4" indicates deficient liquidity levels or inadequate funds management practices. Institutions rated "4" may not have or be able to obtain a sufficient volume of funds on reasonable terms to meet liquidity needs.


  5. A rating of "5" indicates liquidity levels or funds management practices so critically deficient that the continued viability of the institution is threatened. Institutions rated "5" require immediate external financial assistance to meet maturing obligations or other liquidity needs.

Consider the ratings definitions above and compare them to the circumstances described in the Report of Examination for First State Bank. What do you think the appropriate rating for liquidity is?

  1. Strong
  2. Satisfactory
  3. Less than Satisfactory
  4. Unsatisfactory
  5. Critically Deficient

Answer to rating liquidity.

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Last Updated 06/29/2005 Supervision@fdic.gov