BankingCash & Working CapitalTalking Shop

Talking Shop: How Much Liquidity Does Your Holding Company Maintain?

By November 10, 2022No Comments

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Member question: “We are a multibillion-dollar bank and have traditionally held cash and liquid securities to cover four quarters of holding company expenses, including opex, debt, preferred and common dividends. We set the upstream dividend from the bank to the holdco to maintain that level every quarter.

  • “After many years of this practice, the Fed told us best practice was eight quarters, but could not point us to any written guidance. We just moved within the FRB from the Community Bank Organizations to the Regional Bank Organizations supervisory group.
  • “Wondering if the RBO supervisors have a different best practice than the CBO supervisors. Would love to know the current practices of this group.”

Peer answer 1: “There is no written guidance. Pre-Great Recession we ran that ratio at four months. Shortly thereafter, the Fed suggested 12-24 months’ worth was what they wanted to see. We have set the policy minimum at 12 months and probably have never been higher than 20 months.

  • “The other item I still wrestle with, and I’ve pinged this group before, is do you include maturing debt in this calculation?”
  • Member response: “We do include maturing debt in the calculation. We were noodling over 24 months without common dividend, and 12 months with. But the FRB was pretty clear that they were expecting us to get up to 24. So, we’re going to just bite the bullet.”

Peer answer 2: “We hold eight quarters. We have included it in our policy and [it has] never been commented on by either of the regulators.”

Peer answer 3: “We also maintain at least 24 months of liquidity (time to required funding) and assume no access to markets and continuation of dividend payments for 12 months.”

Peer answer 4: “We have a policy of 12-month cash coverage. We usually have more than that. We are Fed at the parent level and OCC at the bank level.”

Peer answer 5: “Our ‘trigger’ is 1.5x annual coverage with a limit of 1x. Also, Fed at parent and FDIC at bank. No criticism or comment and we have had those metric levels for years.”

Peer answer 6: “We have a policy stating the target is four quarters of cash on-hand (with two quarters being the minimum) at the parent company to meet dividends, debt payments, and obligations.

  • “In 2020, the FRB asked that we adopt a liquidity management and contingency funding plan specific for the holding company.”
Justin Jones

Author Justin Jones

More posts by Justin Jones