Contingency Funding Planning: formula sheet

Key formulas

Stress funding gap

Stress funding gap = Stressed cash outflows − Stressed cash inflows − Liquidity buffer available

A positive gap must be covered by contingent sources in the CFP. Use post-haircut buffer values.

Survival horizon

Survival horizon = time until cumulative net outflows exhaust the counterbalancing capacity

The CFP should cover at least the horizon used in stress tests.

Core CFP elements

Triggers + Roles + Sources + Actions + Communication + Testing

Use as a checklist to recognise a complete plan.

Cumulative net outflow

Cumulative net outflow(t) = Σ (outflows − inflows) over days 1 to t

Compare with buffer after haircuts to find when it is exhausted.

Stress type classification

Idiosyncratic = firm-specific; Market-wide = affects many firms; Combined = both at once

Combined stress is the most severe because mitigants such as asset sales and new funding are also impaired.

Early warning indicator logic

Indicator → threshold breached → trigger → escalation / CFP activation

An indicator without a threshold and a defined action is only information, not a control.

Liquidity coverage ratio (for reference)

LCR = Stock of HQLA ÷ Total net cash outflows over 30 days ≥ 100%

A regulatory metric that firms often also use as an internal indicator with an early warning level above the minimum.

Survival horizon

Survival horizon = the first day t at which Cumulative net stressed outflows(t) > Counterbalancing capacity(t)

Capacity must be measured after stressed haircuts and excluding encumbered assets. Capacity may change over time as assets are monetised.

Net stressed cash outflow

Net outflow(t) = Stressed outflows(t) − Stressed inflows(t)

Inflows are often capped or haircut in stress, because counterparties may not pay or may not roll.

Stressed value of a liquid asset

Stressed value = Market value × (1 − haircut)

Haircuts are larger for lower-quality assets and in market-wide scenarios.

Liquidity surplus or shortfall

Surplus (shortfall) = Counterbalancing capacity − Cumulative net stressed outflows

A negative figure at a given horizon means a funding gap the CFP must cover.

Run-off outflow

Outflow = Balance × run-off rate

Rates differ by funding type and by scenario, with higher rates for uninsured and wholesale funding.

Secured borrowing proceeds

Cash raised = Collateral market value × (1 − haircut)

Use the stressed haircut if the question describes stress.

Collateral needed

Collateral required = Cash needed ÷ (1 − haircut)

Rearranged form. Divide by (1 − haircut), do not multiply by (1 + haircut).

Usable buffer

Usable buffer = Σ (market value × (1 − haircut)) for unencumbered eligible assets

Exclude pledged or ineligible assets.

Survival horizon test

Survival horizon is met if counterbalancing capacity ≥ cumulative stressed net cash outflows

Compare capacity with outflows over the chosen horizon.

LCR

LCR = Stock of HQLA ÷ Total net cash outflows over the next 30 calendar days ≥ 100%

Net outflows are stressed outflows less capped inflows.

Escalation logic

EWI breach → assess severity → pre-set level → matching body and actions

Higher severity means more senior decision makers and wider actions. Triggers are set in advance.

Accountability chain

Board approves → Senior management owns → Treasury executes → Risk and audit challenge

Board does not run the crisis; it sets appetite and oversees. Management and the CMT act.

Plan review cycle

Test → find gaps → update → board approval

Review at least annually and after any material change or real stress event.

Survival horizon

Survival horizon = number of days the bank can meet outflows using its liquid resources under a stress scenario

A shrinking horizon is a common escalation trigger.

Survival horizon

Survival horizon = number of days until cumulative net stressed outflows exceed the liquidity buffer

A CFP should show the bank can survive the horizon set by its risk tolerance under stress.

Net stressed cash outflow

Net outflow = stressed outflows − stressed inflows (inflows usually capped or haircut)

Haircut collateral at stressed values, not market values on a calm day.

Liquidity Coverage Ratio

LCR = Stock of HQLA ÷ Total net cash outflows over the next 30 days ≥ 100%

Basel III short-term resilience ratio. The 30-day stress is a minimum, not a full CFP horizon.

Net Stable Funding Ratio

NSFR = Available stable funding ÷ Required stable funding ≥ 100%

Targets structural maturity mismatch over one year, which addresses the pre-crisis reliance on short-term wholesale funding.

Quick revision

• A CFP is a plan of actions for liquidity stress, not a daily cash forecast.
• A good CFP sets out triggers, responsibilities, funding sources, and communication steps.
• Early warning indicators include falling deposits, rising funding costs, widening spreads and credit rating pressure.
• Idiosyncratic stress hits one firm; market-wide stress hits many firms and lowers asset liquidity.
• Combined scenarios are the most severe and usually the most useful for planning.
• Liquidity stress tests should use assumptions on run-off, haircuts and loss of market access.
• Liquidity buffers should be unencumbered and quickly convertible to cash.
• Contingent sources include asset sales, repo, committed lines and central bank facilities, each with limits.
• Central bank borrowing can carry stigma and needs eligible collateral to be pre-positioned.
• Governance needs clear ownership, senior management escalation and board oversight.
• Communication with regulators, markets and customers is part of the plan.
• Past crises showed that funding concentration and reliance on short-term wholesale funding amplify stress.

Common mistakes

• Treating the CFP as the same thing as the liquidity buffer. Fix: The buffer is a stock of assets. The CFP is the action plan that uses the buffer and other sources.
• Thinking a CFP is only for bank-specific problems. Fix: A CFP should cover idiosyncratic, market-wide and combined scenarios.
• Calling any stress event market-wide because markets are mentioned. Fix: Check whether peers are also affected. If only one firm's funding is withdrawn, it is idiosyncratic even if markets are open.
• Assuming asset sales are always a reliable mitigant. Fix: In market-wide and combined stress, asset prices fall and buyers disappear. Assume lower sale value and higher haircuts.
• Valuing the buffer at market value instead of after stressed haircuts. Fix: Always apply the haircut first. Buffer = Market value × (1 − haircut).
• Treating idiosyncratic and systemic scenarios as the same thing. Fix: Idiosyncratic is firm-specific and markets still work. Systemic is market-wide and asset markets and funding are impaired. Combined is both and is usually the most severe.
• Counting pledged assets in the buffer. Fix: Only unencumbered assets count. An asset already used as collateral is gone.
• Using market value without applying the haircut. Fix: Always compute value × (1 − haircut) before totalling.
• Saying the board runs the crisis response day to day. Fix: The board approves the CFP and risk appetite and oversees. The CMT and senior management execute.
• Treating escalation as a purely discretionary call. Fix: Good plans have defined triggers and levels, with room for judgement on top. Pre-set thresholds avoid delay.

Exam tips

• Distinguish clearly between CFP, liquidity buffer, stress test and funds transfer pricing. Many wrong options borrow words from the others.
• Expect case questions asking what a CFP should include or what is weak in a given plan: look for missing triggers, untested sources, or no ownership.
• In numerical items, apply haircuts before netting.
• Remember that the CFP should be based on stress test results and reviewed and tested regularly.
• Read the first sentences carefully to see whether peers are affected. This decides the stress type.
• Combined stress is usually the most severe. Expect questions asking which scenario needs the most conservative assumptions.
• When asked for the best early warning indicator, choose the leading, forward-looking one, not the outcome.
• Expect questions linking breached thresholds to escalation and CFP activation. Know the order: indicator, threshold, trigger, action.