The significant increase in use of Fed funds, "repo" transactions and large, negotiable certificates of deposit to bolster the liquidity position and lending capacity of banks has also raised the level of operating risk to the institutions involved. While these short-term money market transactions may enhance the efficiency and productivity of the financial market, their careless or improper use can seriously threaten the bank's liquidity and overall soundness. Prudent management principles require careful cash-flow planning, assessment of all risks and costs and monitoring of transactions undertaken if "liability management" is to benefit the bank, its stockholders and the public.

Because of our concern for the safety and soundness of banks engaging in these transactions, the Bureau will require the Board of Directors of each state-chartered bank to establish a formal, written policy to guide its management in these transactions. For this purpose, short-term money market transaction include Fed Funds transactions (borrowing and lending), sales and purchases of securities under agreement to repurchase, issuance of negotiable certificates of deposit and other similar type transactions. The policy statement should include:

1. Asset Items
   1. maximum amount of short-term money market asset items to any one borrower

   2. maximum aggregate volume of short-term money market asset items

   3. criteria for assessing credit-worthiness of institutions in which investments are made or to whom money is lent

   4. other guides to enhance the safety, soundness and service function of the bank

2. Liability Items
   1. intended use of funds acquired

   2. maximum aggregate volume of liabilities that may be in the form of short-term money market funds

   3. maturity range and volume distributions of short-term money market items

   4. other guides to enhance the safety, soundness and service function of the bank

It is hoped that this new requirement will strengthen the market for these funds and assist our institutions in their service to stockholders, depositors and the public.

Signed:	Richard J. Francis, Commissioner
Dated:	February 3, 1975