by
Catalyst Corporate | Oct 30, 2023
Liquidity challenges can be a significant hurdle for credit unions. Different strategies and approaches can be used to address liquidity issues, depending on your specific situation.
Here are eight tips to help you solve liquidity challenges:
1. Identify the root causes
Liquidity challenges can persist if the root cause is not identified and addressed. Challenges can stem from an exodus of “hot money,” excessive lending growth, non-competitive deposit rates or a number of other factors.
As witnessed this year, however, not all liquidity stresses are created equally. In today’s market, far more credit unions are running tight on liquidity than are flush with cash. The key is to identify the source and ensure stresses do not transform into serious safety concerns.
2. Improve cash flow management
When liquidity tightens, focus on expected cash flows becomes more crucial to ensure sufficient funds are available when needed. Cash flow management comes in a variety of forms but most often is established in “easier” times. One of the most common cash flow/liquidity management practices is the creation of a sound investment portfolio structure, such as an investment ladder. With an investment ladder, security purchases are determined based on their ability to help ensure a steady stream of maturing investments on a monthly basis.
Additional investment strategies can support cash flow optimization, but the core goal is to ensure your balance sheet (investments and loans) is constructed to provide a steady stream of cash flows into your credit union, even through liquidity stresses.
3. Explore financing options
Every credit union needs ways to secure liquidity when it dries up quickly. Even if financing is needed, positioning your credit union to take care of immediate needs can set yourself up for additional growth later.
Term loans or lines of credit are typically the “go-to” source for immediate liquidity needs.
When you have a longer window to secure funding, additional options become viable, such as non-member deposits or selling loan participations. Both tools may take days to weeks to secure the desired amount of funds. Relative to loan participations, if your liquidity strain is due to excessive loan growth, it's possible that loan rates were below market levels, which could limit your willingness to sell a pool of loans.
4. Diversify revenue streams
One of the most straightforward ways to combat liquidity challenges is to diversify revenue streams. Expanding current offerings to include services such as Catalyst’s BaZing checking rewards program can result in entirely new revenue streams while benefiting members.
5. Explore interest rate derivatives
Derivative hedging services are being used more often as a flexible way to manage interest rate risk exposure. How would derivatives support liquidity? If your credit union is using term borrowings as an on-balance sheet interest rate risk hedging instrument, transitioning to interest rate derivatives as an alternative could free up some much-needed secondary funding capacity.
Interest rate derivatives are products created specifically for managing interest rate risk. While borrowings can be used effectively for the same purpose, the drawback is the use of secondary liquidity sources to manage interest rate risk. While interest rate risk decreases, total liquidity risk exposure increases due to the reduction in additional funding capacity.
6. Cut unnecessary costs
It’s critical to analyze your expenses and identify areas where you can cut costs without compromising essential operations during times of tight liquidity.
Credit unions generally look to offer as much as possible to their members, balanced by the need to run a lean and efficient organization. Cutting unnecessary costs is one way to do that.
7. Monitor and adjust
Managing a balance sheet takes continuous monitoring and adjusting. This often looks like revising budgets, using loan pricing to achieve desired balance sheet allocations or seeking additional financing when advantageous.
Taking a data driven approach to balance sheet management will help establish a credit union for success when making adjustments.
8. Seek professional advice to solve liquidity challenges
Professional advisors, accountants and other experts are often worth consulting. Catalyst Strategic Solutions Advisory Service can help your credit union solve liquidity challenges based on your specific needs.
Remember, it's crucial to approach liquidity challenges strategically and with a long-term perspective. This may involve a combination of short-term tactics and more sustainable, long-term solutions. What works best will depend on your unique circumstances and goals. Get in touch with a liquidity expert today.