Imagine you’re a ship captain navigating stormy seas. The storm here? A financial crisis. Your ship? The bank. And your contingency funding plan? The life raft, flare gun, and the snack pack all rolled into one. So, what’s in this magical raft?
Let’s unpack the essential components of a CFP and understand how they keep your financial ship afloat during tempests.
⚖️ Governance and Oversight — The Command Center
Every great plan needs great generals. A well-structured CFP starts with Governance and Oversight. This ensures that people who know what they’re doing are, well… actually doing something.
💼 Key Players:
- Corporate Treasury – The fund managers of the calm before the storm. They assess macro and micro risks and give the “go” signal when things go sideways.
- Liquidity Crisis Team $($LCT$)$ – Think of them as the financial Avengers. They design the CFP and coordinate when panic ensues.
- Management Committee – These are your in-crisis quarterbacks. They assess liquidity threats and keep stakeholders from diving overboard.
- Board of Directors – They’re the wise council. Their job? Provide oversight, advice, and try not to panic on Zoom calls.
🤝 Communication Is Key
Effective CFPs rely on timely communication. If business units don’t share information quickly, it’s like a fire drill where everyone runs in different directions.
So… if communication is crucial, what kind of structure and guidance keeps everyone aligned?
📚 Policies and Procedures — The Rulebook
No plan survives contact with reality unless it’s well-documented. Your CFP should have:
- Introduction and purpose
- Roles and responsibilities
- Scenarios and escalation
- Monitoring and frequency of reporting
Basically, it’s like IKEA instructions for crisis management. You will get lost without it.
But having a manual isn’t enough. Can we trust the raft doesn’t leak?
🧪 Testing and Readiness — Practice Before Panic
CFPs aren’t just theory—they need rehearsals! Test the fire alarm, don’t just assume it’ll work. Simulate scenarios. Try actions like:
- Selling securities
- Issuing debt
- Calling in the cavalry $($aka the LCT$)$
It helps detect holes in your raft before the flood. Now, what kind of scenarios should we prepare for?
🌊 Scenarios and Liquidity Gap Analysis — Stress Tests with Plot Twists
Your CFP should match your liquidity stress test scenarios. This includes:
- Systemic events $($like market-wide panic$)$
- Idiosyncratic events $($like your CEO tweeting something dumb$)$
The aim? Find liquidity gaps and bridge them before they become financial potholes.
And once we identify those gaps, what next?
🧩 Contingent Actions — Your Crisis Toolkit
Here’s where the magic happens. Once the gaps are known, the firm pulls out its crisis tools:
- Increase deposit rates? ✅
- Sell receivables? ✅
- Cut back on lending? ✅
- Start selling office chairs? 😅 Hopefully not yet.
The right action depends on the type of stress and its intensity. But beware: doing the wrong thing too soon might scream “we’re desperate!” louder than a clearance sale at a luxury store.
So, how do you decide when to act and how urgently?
📈 Monitoring and Escalation — Your Financial Seismograph
Monitoring uses Early Warning Indicators $($EWIs$)$ like:
🌍 Market and Business Measures:
- Stock market drops
- Credit downgrades
- Media panic or scandal
- Asset quality deterioration
💧 Liquidity Health Measures:
- Short-term liabilities vs total assets
- Funding concentration risk
- Liquid assets to volatile liabilities
When things heat up, escalation happens in 3 levels:
- Level 1 – Uh-oh, something’s off. Monitor closely. Tell the LCT to warm up.
- Level 2 – Things are going south. Reduce lending, sell assets. Start preparing escape pods.
- Level 3 – Full-blown crisis. Survive, reduce losses, and pray the emergency coffee machine works.
But these decisions need real-time data to be effective…
📊 Data and Reporting — Fuel for Fast Decisions
Data is the oxygen of the CFP. And we’re not talking once-a-month boardroom charts.
Best practice? Daily reporting—or even intraday—on:
- Cash flows
- Funding sources
- Intraday liquidity
- Contingent liabilities
- Liquidity coverage for future outflows
And hey, throw in some good qualitative color too. Numbers are great, but management also wants to understand the “why” behind the “what”.
🧠 Final Thoughts — Pulling It All Together
Your CFP isn’t a dusty binder. It’s a living, breathing system—a battle plan, a communication tool, and a crisis survival kit.
It answers:
- Who does what?
- When do we act?
- What do we act on?
- How do we recover?
Think of it like a GPS: you don’t just want to know you’re lost—you want rerouting options.
So, the big question now is:
Does your firm’s CFP cover all these components, or is it just a financial “In case of emergency, break glass” sign with no fire extinguisher inside?
Because in the world of liquidity… by the time you feel the thirst, the water might already be gone.