By Kathy Gensler, Senior Investment Solutions Consultant
With total loans/shares on the rise and interest rates uncertain, liquidity management can be challenging.
According to the NCUA, an effective liquidity and interest rate risk management program is critical to a credit union’s safety and soundness. Projected economic fluctuations in 2019 make this an area of increased emphasis. When rates rise, it puts pressure on credit unions to raise deposit rates to maintain deposit account volume.
Looking at credit union year-over-year statistics, total loans outstanding increased $86.3 billion, or 9.0 percent, by year-end 2018 to $1.0 trillion. Loan balances rose in every major category. Shares and deposits rose by $60.3 billion, or 5.2 percent, to $1.22 trillion. The loan-to-share ratio stood at 85.6 percent, up from 82.6 percent at year-end 2017, above the 10-year average of 75.35 percent. The trends reflect a steady decline in loan growth since 2015, as well as a decline in share growth during that same period, resulting in a steady increase in total loans/shares.
Squaring away available funding sources and stress testing your credit union's liquidity are two essential components of effective liquidity risk management.
Funding Sources
Consider the following guidelines when selecting a partner to help meet your credit union’s funding needs:
Loan Participations/Sales – Credit unions can free up liquidity so they can continue to make loans to their members, while still receiving monthly servicing income on the loans that have been participated away. Be sure to look for a program that provides a low cost structure, easy due diligence process and simple remittance process.
Brokered Deposits – Consider a solution that enables your institution to raise deposits and generate liquidity quickly and easily. Be sure you are fully informed regarding related subscription, broker and transaction fees.
Investment Sales – Partner with an investment team that can show you how selling securities from your credit union's portfolio compares to other liquidity options. Ensure they are a reliable source for highly competitive bids.
Borrowings – Evaluate the scope of services provided by the liquidity source – does it supply liquidity for settlement needs, as a liquidity backstop, or for longer term funding? Are collateral pledges available for a variety of asset types?
Stress Testing
A liquidity stress test and forecast analysis can help your credit union with its liquidity strategy. This dynamic projection identifies liquidity shortfalls across various stress scenarios. The analysis projects net cash flows based upon multiple factors, such as growth, unfunded commitments, deposit runoff, and changes in interest rates. Sometimes stress testing is offered in conjunction with an online “what if” tool that generates instant results on your credit union’s liquidity position for a quick answer during Board or ALCO meetings, for example.
Liquidity management can be challenging, but with the proper partners and prudent planning and analyses, such as Catalyst Corporate's loan participations and brokerage services and Catalyst Strategic Solutions' ALM services, you can be prepared for that challenge.