Rethinking Liquidity Stress Testing in Today’s Environment

In an environment marked by rising funding costs, increased deposit mobility, persistent unrealized losses in bond portfolios, and heightened regulatory scrutiny, I wanted to share some practical ideas for how to ensure your liquidity stress testing is a truly meaningful and actionable exercise.

👉 Deposit Segmentation:

One of the most persistent challenges I’ve seen over the years is effectively segmenting the deposit portfolio to truly identify where potential outflow risk may reside.

I suggest breaking it down by:

• Product type (e.g., MMDA, NOW, CDs)

• Channel (branch vs. digital)

• Customer type (consumer vs. commercial)

• Industry (to identify concentration risk - see Silicon Valley Bank!)

• Relationship depth (do they also have loans or treasury services with you?)

Doing this helps you identify concentrations and assess how sticky different segments really are.

💡 Create a Stickiness Score!

One powerful idea I learned years ago from the great Leonard Matz is assigning a "stickiness score" to deposit segments. Use this to drive your stress outflow assumptions - it’s far more meaningful than flat run-off rates. A high stickiness score? Lower outflows. A low score? The kind of deposit that may walk out the door quicker than you originally thought.

🚨 Don’t Forget Contingent Funding

As highlighted in OCC Bulletin 2023-25 (https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-25.html), banks need to evaluate not just the existence of contingent lines, but also their availability and the potential for haircuts under stress. Lines that seem sufficient in calm markets may be less reliable, or come at a higher cost, when markets tighten.

⚠️ The Kicker:

This is one I've been trying to drive home for years. Don’t wait for the stress to arrive before acting! 

If your model shows trouble in a realistic scenario, take action now. Raise liquidity while markets are stable and pricing is manageable. Waiting until you're in the storm could make execution much harder - and a lot more expensive.

Stress testing is only valuable if it drives decision-making.

Now is the time to use it as a proactive tool, not just a regulatory requirement.