A Contingency Funding Plan (CFP) is a liquidity management tool that links the stress test results and other related information as inputs to the CFP governance, decision framework, and menu of contingent liquidity actions. It's a critical component of a financial institution's risk management strategy, developed to ensure that the institution has sufficient liquidity to continue operations in the event of a crisis or unexpected event.
i. Liquidity Crisis Management: A CFP is essentially a liquidity crisis management instrument. It outlines the actions that the institution will take to raise additional funds, such as issuing new debt or tapping into credit lines and the steps that the institution will take to conserve cash and reduce spending in the event that funding becomes scarce.
ii. Address High-Impact Low-Probability Events: Institutions manage low-impact and high-probability events as part of their business-as-usual (BAU) funding and liquidity risk management activities. On the other end, they use CFPs to address high-impact low- probability events.
iii. Develop and Implement Financial and Operational Strategies: Institutions use CFPs to develop and implement their financial and operational strategies for effective management of contingent liquidity events.
iv. Integration with Broader Risk Management Frameworks: Similar to enterprise risk management (ERM), capital management, and business continuity and crisis management, CFP is an integrated part of an institution's risk management and the broader risk management framework.
v. Early Warning Indicators (EWIs): Early warning indicators (EWIs) are tools that organizations can use to identify potential financial crises or emergencies before they occur. Under a CFP, early warning indicators can be used to identify potential funding shortfalls and trigger the invocation of the CFP before the crisis becomes severe.
It's always recommended to consult with a financial advisor or professional for more specific insights.