So if simply having access to funding is not indicative of a strong liquidity position, what is? What should directors look at when assessing their bank's liquidity? Here are five areas to review to help understand your bank's liquidity position.

1. Net Non-Core Funding Dependence Ratio - This ratio measures the degree to which the bank is funding longer-term assets (loans, securities that mature in more than one year, etc.) with non-core funding. Non-core funding includes funding that can be very sensitive to changes in interest rates such as brokered deposits, CDs greater than $100,000, and borrowed money. Higher ratios reflect a reliance on funding sources that may not be available in times of financial stress or adverse changes in market conditions.



2. The availability of liquid assets readily convertible to cash without undue loss- Consider Federal funds sold, available for sale securities, loans for sale, etc.



3. Core deposit/asset growth - Are core deposits capable of funding anticipated asset growth?



4. Diversification of funding sources - A bank with strong liquidity has a strong core deposit base, established borrowings lines, and procedures in place for acquiring internet-based or other forms of emergency borrowing.



5. External Forces - Economic conditions, competition, marketing efforts, etc. have a material impact on the need for liquidity going forward.

You can see from these last three items that liquidity is about more than just your balance sheet; it's also about how well your bank manages liquidity. You'll see that management will have a material impact on all CAMELS components throughout this tutorial. When it comes to liquidity, one of the most important evaluation factors is management's ability to measure, monitor, and control the liquidity position, which includes more than a simple ratio or balance sheet analysis.

1. Do we have a competitor aggressively trying to steal our depositors?
2. Does the management team anticipate exceptional loan growth?
3. How will the local or national economy influence our ability to generate and maintain deposits and loans?
4. Does an increasing trend in off-balance sheet items (loan commitments for example) suggest future liquidity strains?
5. How will the bank's marketing efforts impact loan/deposit growth?
6. How will changes in interest rates impact liquidity?

This is just a small sampling of items that could impact liquidity. Board members and managers should consider all of these things and more when evaluating a bank's liquidity position, regardless of how your bank chooses to evaluate liquidity. This strategic analysis will need to be done as a complement to your ratio analysis.