For smaller and mid-sized banks, funding plans have traditionally been treated as policy documents: updated periodically, aligned with regulatory expectations, and reviewed during internal governance cycles. In today’s environment, that approach is no longer sufficient.
Rising interest rates, increased deposit competition, and a greater reliance on wholesale funding sources are putting pressure on balance sheets and exposing weaknesses in static funding assumptions. Reliable funding plans are no longer just about diversification, they must be dynamic, forward-looking, and closely integrated with asset-liability management (ALM) frameworks.
This article outlines what distinguishes a robust funding plan in practice, where smaller banks typically face challenges, and how to move towards a more resilient approach.
Why funding plans fail in practice
Most smaller banks already have a documented funding strategy. The issue is not absence of planning, but rather how those plans behave under stress.
Common weaknesses include:
- Over-reliance on historical deposit stability
Deposit behaviour is often modelled based on past patterns, assuming stability even when rate environments or competitive dynamics change. In practice, deposit sensitivity can shift quickly, particularly in periods of tightening liquidity. - Static assumptions about funding access
Wholesale funding sources may appear readily available under normal conditions, but access, pricing, and capacity can change materially during stress scenarios. - Limited integration with ALM and scenario analysis
Funding plans are often maintained separately from balance sheet modelling, making it difficult to assess the combined impact of interest rate movements, liquidity shocks, and growth strategies. - Contingency plans that are not operationalised
While contingency funding plans (CFPs) exist, they are not always tested or linked to clear early warning indicators, limiting their effectiveness when needed.
A reliable funding plan, therefore, is not defined by its structure, but by its ability to remain valid under changing conditions.
What has changed: the pressure on smaller banks
Several structural shifts have made funding strategy more complex for smaller institutions:
- Deposit competition is intensifying
Slower core deposit growth and increasing competition from alternative providers reduce the stability of traditional funding bases. - Greater reliance on non-core funding
As loan growth continues, banks are increasingly turning to wholesale funding sources, which are inherently more sensitive to market conditions. - Higher funding costs and rate volatility
Interest rate uncertainty affects both the cost and availability of funding, requiring more active management of maturity structures and repricing risk. - Regulatory focus on funding resilience
Supervisory expectations increasingly emphasise diversification, stress testing, and the ability to maintain access to liquidity under stressed conditions.
These trends mean that funding plans cannot be assessed in isolation—they must be evaluated as part of the broader liquidity and ALM framework.
Core components of a reliable funding plan
A robust funding plan for a smaller bank is characterised by three key elements: diversification, realism, and responsiveness.
1. Diversification with clear limits
Diversification remains fundamental, but it must go beyond high-level targets.
Banks should define:
- concentration limits for large depositors
- maximum reliance on volatile funding sources
- clear thresholds for non-core vs core funding
The objective is not simply to diversify, but to ensure that no single funding channel can materially destabilise the balance sheet.
2. Realistic funding behaviour under stress
Reliable plans explicitly model how funding sources behave in adverse scenarios.
This includes:
- deposit outflow assumptions based on customer segments, not aggregates
- constrained access to wholesale funding
- increased funding costs under stress conditions
Importantly, these assumptions should be tested against multiple scenarios, not a single baseline stress case.
3. Integration with ALM and liquidity risk management
Funding planning should be embedded within the ALM process rather than treated as a separate exercise.
This enables:
- consistent modelling of cash flows, repricing, and maturity mismatches
- alignment between funding strategy and interest rate risk (IRRBB)
- forward-looking analysis of funding gaps under different scenarios
Without this integration, funding decisions risk being reactive rather than strategic.
4. Operational contingency planning
A contingency funding plan is only effective if it is actionable.
Banks should ensure:
- clearly defined early warning indicators
- predefined funding actions linked to stress levels
- tested access to alternative funding sources
This requires regular simulation or dry-run exercises, rather than relying solely on documentation.
From static policies to dynamic funding management
The key shift for smaller banks is moving from static planning to dynamic management.
In practice, this means:
- regularly updating funding assumptions based on market developments
- linking funding strategy to forward-looking balance sheet simulations
- monitoring funding gaps continuously rather than periodically
- ensuring alignment between treasury, ALM, and risk functions
Manual or spreadsheet-based approaches often struggle to keep pace with this level of complexity, particularly when multiple scenarios and constraints must be evaluated simultaneously.
A more integrated approach—combining liquidity risk, funding strategy, and ALM analytics—provides a clearer view of how funding behaves under different conditions and supports more informed decision-making.
Conclusion
For smaller banks, a reliable funding plan is no longer defined by diversification alone. It depends on the ability to understand how funding sources behave under stress, how they interact with the balance sheet, and how quickly the bank can respond when conditions change.
As funding environments become more volatile, the distinction between policy and execution becomes critical. Banks that treat funding planning as a dynamic, integrated process, rather than a static requirement—are better positioned to maintain liquidity, manage risk, and support sustainable growth.