Introduction

The banking stress events of 2023 served as a reminder that liquidity risk rarely crystallises because of a single weakness. More often, stress emerges through the interaction of multiple vulnerabilities: concentrated funding, rapid changes in depositor behaviour, interest rate risk, unrealised losses, governance weaknesses or delays in management response.

The failures of Silicon Valley Bank (SVB), Signature Bank and the subsequent stress experienced by other institutions demonstrated that liquidity resilience must extend beyond regulatory metrics. A bank may maintain regulatory liquidity ratios and still face significant vulnerability if its funding assumptions, governance processes, contingency planning and risk management framework are not sufficiently robust.

The supervisory response has reinforced this message. In its review of SVB's failure, the Federal Reserve identified weaknesses across governance, risk management, including liquidity risk management and interest rate risk management, and supervisory escalation as important contributing factors.1

Across the United States and United Kingdom, supervisors have emphasised that effective liquidity risk management requires more than compliance with minimum requirements. Banks must demonstrate that they can identify emerging risks, challenge assumptions, execute contingency funding plans and make timely decisions during periods of stress.

Lesson 1: Liquidity Risk Assumptions Must Reflect Today's Operating Environment

What happened?

For many years, liquidity stress testing was heavily informed by historical experience. Deposit behaviour was often considered relatively stable, funding markets were assumed to remain available and management intervention was expected to occur over a reasonable timeframe.

The events of 2023 challenged these assumptions as the existence of digital banking channels, mobile payments and rapid information dissemination changed the speed at which liquidity events can develop. Depositors can move significant balances quickly, while market confidence can deteriorate faster than traditional stress scenarios anticipated. The Federal Reserve's review of SVB highlighted that the firm's risk profile evolved rapidly while governance and risk management practices did not keep pace with changes in the institution's exposure.2

What supervisors said

The Basel Committee has long emphasised that banks should maintain robust liquidity risk management frameworks capable of assessing a range of stress scenarios, including institution-specific and market-wide events.3 Supervisors have continued to reinforce expectations that:

  • Stress scenarios should remain forward-looking
  • Behavioural assumptions should be challenged regularly
  • Liquidity risk metrics should provide meaningful early warning
  • Management information should support timely decisions

Lesson 2: Funding Diversification Requires Understanding Behaviour, Not Just Concentration

What happened?

Funding diversification has always been a fundamental principle of liquidity risk management. However, recent events demonstrated that diversification cannot be measured solely by the number of funding sources. Two institutions may have similar funding concentrations but materially different risk profiles depending on customer behaviour, depositor characteristics and the speed at which funds can leave.

What supervisors said

The OCC's Comptroller's Handbook: Liquidity reinforces expectations that banks understand funding sources, concentration risks, behavioural characteristics and contingency funding capabilities.4 Supervisors continue to focus on:

  • Deposit concentration
  • Uninsured and potentially less stable funding
  • Behavioural assumptions
  • Access to alternative funding sources

Lesson 3: Contingency Funding Plans Must Be Operationally Executable

What happened?

The banking stress events of 2023 highlighted significant limitations in the practical execution of Contingency Funding Plans (CFPs). While affected institutions maintained documented liquidity contingency frameworks in line with regulatory expectations, the pace and scale of deposit outflows outstripped many traditional planning assumptions.

The failures of Silicon Valley Bank, Signature Bank and First Republic Bank demonstrated that liquidity stress can escalate within hours rather than days, reducing the time available for management intervention.

What supervisors said

Supervisory reviews concluded that a CFP provides limited value if it exists solely as a documented policy; rather, it must be operationally executable, supported by robust governance, timely management information, predefined escalation triggers and the capability to implement funding actions immediately during periods of stress.

US banking agencies emphasised the importance of operational readiness, including the ability to access contingent funding sources, mobilise collateral and execute liquidity actions when required.5 The PRA similarly emphasises through its liquidity supervisory framework and ILAAP expectations that firms must demonstrate effective liquidity management under stressed conditions.6

Lesson 4: Liquidity, Capital and Interest Rate Risk Cannot Be Managed Independently

What happened?

The banking stress events of 2023 demonstrated that liquidity, capital and interest rate risk are inherently interconnected and cannot be managed effectively in isolation. While the initial catalyst for several bank failures was the rapid withdrawal of deposits, the underlying vulnerabilities had developed over time through the interaction of rising interest rates, unrealised losses on securities portfolios, funding concentrations and declining market confidence.

As central banks increased policy interest rates, the market value of banks' fixed-income securities declined significantly. When large-scale deposit withdrawals occurred, institutions were forced to monetise assets that had previously been intended to be held to maturity, converting unrealised losses into realised losses and eroding capital. This created a reinforcing feedback loop in which liquidity stress forced asset sales, realised losses reduced capital, and weaker capital intensified liquidity pressures.

What supervisors said

Supervisors have increasingly emphasised integrated balance sheet risk management, particularly the interaction between liquidity risk, interest rate risk and capital planning. The failures of SVB, Signature Bank and First Republic Bank illustrated that balance sheet risks cannot be viewed through independent regulatory lenses.

Looking Ahead

The banking stress events of 2023 did not fundamentally alter the principles underpinning effective liquidity risk management. Rather, they reinforced a long-standing supervisory message that liquidity resilience depends not only on the existence of regulatory metrics and documented policies, but on the strength of the underlying governance, risk management processes and operational capabilities supporting them.

Across the United States and United Kingdom, supervisors have continued to emphasise that liquidity resilience requires a forward-looking approach that combines robust stress testing, credible contingency funding arrangements, effective risk governance and the ability to make timely decisions under rapidly changing conditions.

For banks across the United States and United Kingdom, the key question is not whether another period of liquidity stress will occur, but whether their balance sheets, governance structures and management processes are sufficiently resilient when it does. Institutions that successfully navigate future stress events will likely be those that have moved beyond minimum compliance and developed integrated balance sheet management capabilities that connect liquidity, capital, interest rate risk and strategic decision-making.