A contingency funding plan (CFP) is the document in which a bank sets out how it would respond to a serious disruption in its ability to fund itself. It identifies the signs that a liquidity problem is developing, assigns responsibility for managing it, lists the sources of cash the bank could draw on and their likely size and timing, and lays down how the bank would communicate with supervisors, counterparties and the public.
Liquidity failures move quickly, and a bank that has to work out its response during a crisis is unlikely to act in time. The plan is therefore prepared in calm conditions. It is a core element of liquidity risk management, required by the Basel Committee's principles for sound liquidity risk management, published in 2008, and by national supervisors. The same document is sometimes called a liquidity contingency plan. It complements the bank funding plan, which describes funding in normal conditions.
Early warning indicators and triggers
A plan begins with indicators that are monitored routinely. They are both internal and market-based. Typical examples are unusual deposit withdrawals, a falling liquidity coverage ratio (LCR), rising cost or shortening maturity of wholesale funding, counterparties cutting credit lines or demanding more collateral, a widening of the bank's credit spreads, a falling share price, rating downgrades or negative outlooks, and adverse media coverage.
Indicators are tied to escalation levels, often colour-coded. At the first level, monitoring is intensified. At higher levels, a crisis committee is convened and the plan's actions are invoked. Thresholds are set so that the plan is activated early, while options remain available.
Sources of contingent funding
The centre of the plan is a menu of actions, each with an estimate of how much it would raise, how quickly, at what cost and with what side effects. Common measures are:
- Using the buffer. The bank sells or borrows against the unencumbered liquid assets in its liquidity buffer, usually through a repurchase agreement (repo).
- Central bank facilities. Collateral is positioned in advance so that the bank can borrow from a central bank standing facility. Emergency support from the lender of last resort is a separate matter and is not counted on.
- Secured funding. Loans are pledged, securitised or sold.
- Deposits. The bank raises rates or launches new products to attract or retain deposits.
- Committed lines. Facilities from other banks are drawn, where they exist.
- Balance sheet restraint. New lending and discretionary outflows are slowed, and dividends or buybacks are suspended.
- Intragroup support. Funds are moved between entities, subject to regulatory limits on transfers.
The plan should recognise that actions interact. Selling assets at a loss weakens capital; raising deposit rates sharply or drawing emergency lines can signal distress and make matters worse.
Link to stress testing
The plan is calibrated against the bank's liquidity stress testing. Scenarios cover a problem specific to the bank, a market-wide disruption and a combination of the two, over horizons from a few days to several months. For each scenario, the stressed outflows, driven by assumptions such as the deposit runoff rate and drawings on credit lines, are compared with the funds that the plan's actions could realistically raise. If the actions are insufficient, the bank must hold more liquid assets or reduce its exposure.
The assumptions matter greatly. In March 2023, Silicon Valley Bank faced withdrawal requests for a large fraction of its deposits within a single day, far faster than traditional scenarios assumed, and much of its base consisted of uninsured deposits held by connected customers. Supervisors have since asked banks to consider faster outflows and to verify that they can actually access central bank facilities at short notice.
Governance and communication
The plan names the people authorised to invoke it and the membership of the crisis management team, normally drawn from treasury, risk, finance, operations, legal and communications, and reporting to the chief executive. It defines decision rights, contact lists and the management information to be produced daily or more often, including intraday positions.
Communication is treated as a funding tool in its own right. A bank run is driven by loss of confidence, so the plan prepares messages for depositors, investors, rating agencies, staff and the media, and sets out how and when the supervisor and central bank will be informed.
Testing and maintenance
A plan that has not been tested may fail on practical points. Banks are expected to carry out regular exercises: simulations in which the crisis team works through a scenario, and operational tests in which small transactions are executed to prove that assets can be sold or pledged, that central bank accounts and legal documentation are in place, and that systems can produce the required data. Findings are used to update the plan.
The plan is reviewed at least once a year and after material changes in the business or markets, and it is approved by the board. It is overseen by the committee responsible for asset liability management (ALM). It should also be consistent with the bank's recovery planning, which addresses severe stress more broadly, including capital, and which usually incorporates the contingency funding actions as its liquidity options.