Funding Sources Aren't Real Until Tested: How to Prove Your Contingency Funding Plan Works

TL;DR

• The 2023 Interagency Addendum (OCC Bulletin 2023-25, FDIC FIL-39-2023) explicitly requires institutions to test contingent funding sources on a regular basis — including conducting small-value transactions to maintain discount window operational readiness.
• SVB had not tested its discount window arrangement in the year before failure. Signature Bank had not tested for five years. Both lacked the operational arrangements to move collateral quickly. The sources were listed in their plans; they just didn’t work under pressure.
• A fund-flow test is not a tabletop exercise. It’s an operational confirmation: can you access this source, move this collateral, clear this payment, in this timeframe, today?
• Evidence artifacts — test records, confirmation letters, transaction logs, counterparty contacts — are what examiners compare to the CFP during examination.

In March 2023, Silicon Valley Bank’s liquidity position deteriorated in roughly 48 hours. The bank had a Contingency Funding Plan. It listed the Federal Reserve’s discount window as a contingent funding source. What it did not have was a bank that had tested discount window access in the previous 12 months, or staff who understood the collateral mobilization cut-off times for moving assets from the FHLB to the Federal Reserve. Signature Bank, similarly, had reportedly not conducted a discount window test in five years.

Both banks had the document. Neither had the operational machinery behind it.

That’s the core problem with how most institutions approach CFP testing: the plan lists the sources; nobody proves they work.

Why “Listed” Is Not the Same as “Available”

A contingency funding plan is only as good as its weakest funding source — and a source you’ve never accessed is weaker than you think.

Contingent funding sources fail in practice for predictable reasons:

• Borrowing agreements lapse or aren’t current. A credit line confirmed two years ago may have changed terms, required collateral updates, or been subject to material adverse change clauses that alter availability.
• Counterparty contact information is stale. The person who originally set up your Federal Home Loan Bank borrowing relationship has left the institution. Nobody on the current team knows the operational mechanics of a draw.
• Collateral pledging isn’t set up. Collateral may need to be pre-positioned, legally pledged, and registered with the custodian before it can support borrowing. If those steps haven’t been completed, the source isn’t accessible.
• Payment rails have timing constraints. Fedwire has cutoff times. FHLB advances have same-day availability windows. Moving collateral between the FHLB and the Federal Reserve takes time and requires operational coordination that hasn’t been established.
• Nobody has run the process end-to-end. The people listed as responsible for CFP activation have never actually done it. When stress hits, the learning curve is catastrophic.

This is precisely what regulators found after the 2023 banking crisis — and it’s exactly what the 2023 Interagency Addendum was written to address.

What the 2023 Addendum Actually Requires

The 2023 Addendum to the Interagency Policy Statement on Funding and Liquidity Risk Management — issued jointly by the OCC, FDIC, NCUA, and Federal Reserve on July 28, 2023 — goes beyond the baseline 2010 Interagency Policy Statement. It requires specific operational readiness actions:

“Depository institutions should be aware of the operational requirements to obtain funding from contingent sources, including testing access to contingent funding sources on a regular basis.”

“Depository institutions should regularly test any contingency borrowing lines to ensure the institution’s staff are well versed in how to access them and that they function as envisioned.”

For discount window access specifically, the 2023 Addendum states that if the discount window is part of the CFP, the institution should “establish and maintain operational readiness to use the discount window, which includes conducting periodic transactions.”

That phrase — conducting periodic transactions — is specific. Not reviewing the agreement. Not calling the relationship manager. Actually conducting small-value transactions to confirm the operational mechanics work and staff know how to execute them.

The FDIC’s community bank liquidity examination page reinforces this: examiners are looking at whether borrowing lines have been tested and whether institutions understand the operational requirements of accessing collateral, particularly for FHLB advances where collateral eligibility and advance limits can shift based on financial condition.

What a Fund-Flow Test Actually Is

A fund-flow test is an operational confirmation that money can actually move through the mechanism described in your CFP, in the timeframe assumed, using the collateral and counterparty relationships documented.

It is not a tabletop exercise. A tabletop tests your governance process — who decides, which triggers apply, how the escalation chain works. A fund-flow test tests the plumbing.

For each contingent funding source in your CFP, a fund-flow test answers:

1. Can we initiate a draw today? Is the documentation current, the counterparty relationship active, and the right people authorized?
2. What collateral is required, and is it pledged? Are there haircuts, eligibility restrictions, or pledging steps that need to be completed before funding is available?
3. What’s the timing? Same-day? Next-business-day? What are the cut-off windows?
4. Who executes it? Do the people responsible today know how to do it — not who was responsible two years ago?
5. What’s the maximum we can draw, and has that been confirmed recently? A credit line confirmed at $25M in 2022 should be confirmed again, especially if your financials or the counterparty’s risk appetite has changed.

Fund-Flow Testing by Source Type

Different contingent funding sources require different testing approaches. The following table summarizes what testing should confirm for each common source type.

Testing the Discount Window

Of the common CFP sources, discount window access has received the most specific regulatory attention since 2023 — for good reason. The mechanics of discount window borrowing require pre-positioned collateral, a Master Loan and Security Agreement (MLSA) with the Federal Reserve Bank, and operational procedures that most institutions haven’t exercised.

The 2023 Addendum is explicit: conducting periodic transactions maintains operational readiness. Small-value test borrowings — even $1 in some cases — confirm that the agreement is active, collateral is appropriately positioned, and staff can execute the draw. The record of that transaction is what the examiner asks for.

If your CFP lists the discount window and you have no transaction record in the last 12 months, that’s a gap.

Testing FHLB Advances

FHLB capacity is not fixed. It depends on your collateral balance, your financial condition, and the FHLB’s credit assessment of your institution. The Federal Home Loan Banks have made changes to risk rating programs that can reduce borrowing capacity based on examination findings or financial deterioration — meaning a capacity number from a year ago may no longer reflect your actual availability.

Testing means confirming: the amount of collateral pledged, the current advance capacity (not last year’s letter), any blanket lien restrictions or eligibility changes, and the operational steps to initiate a same-day advance. It also means identifying who at the FHLB handles distressed-institution draws — the relationship manager and the operations contact are often different people.

Testing Correspondent Bank Lines

Fed funds lines and correspondent bank credit facilities are frequently listed in CFPs and rarely tested. The test is simple: call the counterparty, confirm the line is active and the availability amount, document who you spoke to, and update the contact log. That contact log is evidence. The test schedule should specify that this call happens at least annually for each line.

Lines that haven’t been confirmed in 18+ months should be treated as unconfirmed, not available — regardless of what the original agreement says.

What to Put in the Evidence Binder

The evidence binder is what regulators compare to the CFP during examination. For each contingent funding source, the binder should contain:

• Test date and description: when the test occurred, what was tested, who executed it
• Amount confirmed available: the actual capacity at the time of the test, not the contract maximum
• Collateral schedule: what collateral is pledged, current haircuts, and eligibility status
• Counterparty contact sheet: who to call at each institution, with backup contacts
• Operational steps: step-by-step draw instructions — not a policy reference, but actual operational procedure
• Exception notes: anything found during testing that differed from what the CFP assumed, and how it was resolved
• Next test date: the scheduled date of the next test for this source

The FDIC’s examination guidance on community bank liquidity is clear that this documentation isn’t just recordkeeping — it’s how the examiner assesses whether the CFP is operational or theoretical.

Common Gaps Examiners Flag

Based on examination findings and the 2023 Addendum’s specific callouts, the most common gaps include:

No test record at all. Sources are listed, but there’s no evidence anyone has confirmed they’re accessible. This is the most common finding and the easiest to fix.

Stale contacts. The person responsible for executing a discount window draw has left the institution. There’s no successor designated and trained. The source is still listed.

Collateral not pledged. The CFP assumes collateral is pledgeable, but the institution hasn’t actually gone through the steps of establishing a pledge agreement with the Fed or pre-positioning with the FHLB. The funding takes longer than assumed — sometimes long enough to miss the liquidity window.

Timing assumptions are wrong. The CFP says a source can be accessed same-day. The test reveals it requires 24 hours and specific cutoff times. That gap can be fatal in an actual liquidity event.

No documentation of what the test found. A test was conducted, but nobody recorded the results. Examiners want to see what the test revealed — not just confirmation that one happened.

So What?

The 2023 Addendum didn’t create new complexity — it named a problem that existed before SVB collapsed. Funding sources listed in a CFP aren’t real until someone proves they work: contacts confirmed, collateral positioned, timing understood, staff trained.

The documentation burden isn’t heavy. A one-page test record per source, updated annually, with a clear evidence binder, satisfies what examiners are looking for. The operational burden is the actual testing — which is the point. If you can’t execute the test, you can’t execute the draw.

An early warning indicator program tells you when to reach for the CFP. A tested, documented CFP tells you whether reaching for it will actually work.

If the lessons from SVB and Signature Bank have a single takeaway for practitioners, it’s this: the plan only protects you if the plumbing works. Proving the plumbing works is the test.

The Financial Risk Management Kit includes a CFP template, fund-flow testing worksheet, and evidence binder structure designed for OCC and FDIC examination readiness.