The foundations

Why Funding Diversification Matters

Financial institutions depend on reliable access to funding to support their activities, meet obligations and respond to changing cash-flow requirements. The composition of that funding can influence an institution’s flexibility, liquidity profile and exposure to market developments.

Where funding is concentrated among a small number of depositors, counterparties, instruments or markets, the loss or reduction of one significant source may create pressure. Diversification aims to reduce excessive dependence on any single source by developing a broader mix of funding relationships and arrangements appropriate to the institution’s business model.

Diversification is not simply about increasing the number of providers. Different funding sources may respond to the same economic conditions, and several apparently separate relationships may be exposed to similar risks. Understanding those connections is therefore an important part of the process.

Risk awareness

Understanding Funding Concentration

Funding concentration occurs when an institution relies disproportionately on a particular provider, customer segment, instrument, market or maturity profile. Such concentration is not necessarily inappropriate in every circumstance, but it should be identified, measured and managed against the institution’s risk tolerance.

Concentration can arise in several ways:

• Provider concentration: a significant proportion of funding depends on a limited number of depositors or counterparties.
• Market concentration: access to funding depends heavily on one geographical market or a particular source of market liquidity.
• Instrument concentration: funding depends substantially on one type of deposit, borrowing arrangement or financial instrument.
• Maturity concentration: substantial funding obligations fall due within a narrow period, creating refinancing requirements.
• Behavioural concentration: several funding sources may be exposed to similar withdrawal patterns or market sentiment.

Monitoring these exposures helps institutions understand where a disruption could have a disproportionate effect. Appropriate limits, management reporting and escalation procedures can support timely decisions when concentrations approach established thresholds.

Strategic planning

Developing a Diversified Funding Approach

A funding strategy should reflect the institution’s size, business activities, regulatory environment, risk profile and anticipated cash flows. There is no single funding mix suitable for every institution.

Broaden funding relationships thoughtfully

Institutions may assess a combination of customer deposits, institutional relationships, secured funding, unsecured wholesale funding and capital-market instruments where appropriate and available. Each option has its own eligibility requirements, costs, operational considerations and potential limitations.

Building relationships before funding is urgently required can improve preparedness. However, a relationship or indicative commitment should not automatically be treated as funding that will be available during a period of market stress.

Consider different maturities

The timing of funding inflows and repayment obligations matters as much as their total value. A strategy that considers short-, medium- and longer-term requirements can help identify refinancing pressure and mismatches between assets and liabilities.

Institutions should examine contractual maturities alongside realistic assumptions about customer behaviour, renewal rates, early withdrawals and the availability of replacement funding.

Evaluate cost alongside resilience

The least expensive funding source is not necessarily the most suitable in every circumstance. Pricing decisions should consider the total cost of funding, its expected stability, maturity, collateral requirements, operational accessibility and contribution to overall liquidity risk.

A structured comparison helps decision-makers evaluate the trade-offs between immediate cost and the flexibility needed to respond to changing conditions.

Treasury oversight

Connecting Funding Strategy with Liquidity Planning

Funding diversification is most effective when integrated into the wider treasury and liquidity management framework. A list of potential funding sources alone does not establish whether an institution can access the required funds, in the required amount, at the required time.

Useful areas of review include:

• Cash-flow forecasting: project expected inflows and outflows over relevant time horizons, including material contingent obligations.
• Funding availability: assess whether proposed sources are operationally accessible, contractually available and subject to conditions.
• Stress testing: examine institution-specific and market-wide scenarios, including deposit outflows and reduced access to wholesale funding.
• Liquid asset buffers: evaluate the availability of unencumbered liquid assets in line with applicable requirements and the institution’s risk profile.
• Contingency planning: define alternative actions, responsibilities, escalation triggers and communications for periods of funding pressure.
• Regular reporting: monitor concentrations, funding costs, maturity profiles and early-warning indicators.

These activities should be proportionate to the institution’s complexity and exposures. Assumptions also require regular review as business conditions, depositor behaviour and market access evolve.

Depositor relationships

The Role of Professional Deposit Relationships

Deposit sourcing can form part of an institution’s broader funding strategy. A disciplined approach involves understanding the characteristics of potential depositors and arrangements, the terms on which funds may be placed, and the operational and compliance requirements involved.

Institutions should consider the expected duration and stability of deposits, withdrawal conditions, pricing, depositor concentration and the implications for liquidity under different scenarios. The appropriate assessment will depend on the nature of the arrangement and the applicable legal and regulatory framework.

Relationship development should be supported by appropriate due diligence, transparent documentation and clear communication. Where intermediaries or third parties are involved, institutions should establish their respective roles, responsibilities, permissions and applicable regulatory status before proceeding.

Importantly, professional deposit relationships do not eliminate funding risk. Depositor behaviour can change, and funds that appear stable in normal conditions may become less predictable during periods of uncertainty.

Preparedness

Testing the Strategy Under Changing Conditions

A funding strategy should be tested against scenarios that challenge its underlying assumptions. For example, an institution could assess the consequences of a large depositor withdrawing funds, a reduction in market access, increased collateral requirements or a simultaneous rise in funding costs.

Scenario analysis can help reveal whether alternative sources are genuinely independent, whether they can be accessed within the required timeframe, and whether operational or contractual constraints could delay their use.

Contingency funding arrangements should be documented, assigned to responsible teams and tested periodically. Institutions should also consider whether several planned responses depend on the same counterparties, collateral or market conditions.

The purpose is not to predict every possible event. It is to develop a realistic understanding of vulnerabilities and establish workable responses before a funding disruption occurs.

Governance

Embedding Funding Decisions in Institutional Governance

Effective funding diversification requires clear accountability. Treasury, risk management, finance and relevant business teams should work within an agreed framework that defines responsibilities, limits, reporting requirements and escalation procedures.

Senior management and the board, or their delegated committees, should receive information that enables them to assess material funding exposures and the institution’s ability to respond to adverse conditions. Decisions should reflect the institution’s risk appetite and applicable regulatory obligations.

Funding policies should also be reviewed as the institution changes. Growth plans, new products, shifts in customer behaviour, changes in market conditions and developments in regulation may all affect the suitability of the existing funding mix.

The outlook

Building a More Resilient Funding Strategy

Deposit sourcing and funding diversification are ongoing strategic considerations rather than one-off exercises. Their value depends on how well an institution understands its funding profile, assesses concentration, tests assumptions and maintains access to credible alternatives.

A thoughtful approach brings together cost, maturity, accessibility, depositor behaviour, liquidity forecasting and governance. It recognises that a wider funding mix can support resilience, but that diversification alone cannot remove liquidity risk or guarantee access to funding during market disruption.

For financial institutions, the objective is to develop a funding strategy that is consistent with their operating model, risk tolerance and long-term financial plans.