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Look Out for Late Year Liquidity Demands
Wednesday, August 2, 2017 6:40 AM

by Casey Peterson, Senior Advisor, Catalyst Corporate FCU

With the first half of 2017 in the rear view mirror, many credit unions are wondering where to focus their attention. After all, economic growth has been slow and steady – emphasis on slow – and from a regulatory perspective, not much has changed this year. At least not yet.

A return to seasonal trends in share growth, combined with a rise in short-term interest rates could change all of that and trigger potential liquidity issues. According to peer data, the share growth in Q1 2017 for mid-size and small credit unions was modest. These credit unions will be more sensitive to a potential rise, and seasonal trends for late-year deposit run-off could push their share growth toward flat-to-negative balances.

If that isn’t enough to shift a credit union’s focus, consider the fact that if liquidity does tighten, many financial institutions may proactively raise deposit rates to secure current shares and to attract potential new shares. The combination of these two events could create liquidity concerns for many credit unions.

But, credit unions can take steps to minimize the impact of interest rate hikes and potential liquidity pitfalls.

Liquidity Ratio Monitoring. Credit unions should continually assess liquidity ratios in both the current and future environments. Compare the results against historical trends to gain a better perspective of what to expect.

Balance Sheet Cash Flow Forecasting and Analysis. To maintain share balances and to attract new shares, credit unions must evaluate the impact of potential increases on term and non-term share dividend rates.

Loans and Investment Cash Flow Schedules. Knowing how balances will flow is half the battle. Credit unions should develop forecast scenarios on loans and investments to prepare for potential liquidity gaps or cash flow issues, assuming a moderate increase in short-term rates.

Validate Borrowing Sources. Don’t wait until the last minute to cover your bases. Establish and regularly update lines of credit for short-term and long-term needs by evaluating lenders and collateral requirements prior to any fiscal changes.

Liquidity risk doesn’t often lead to failure by itself. And while credit unions can’t always prevent unfortunate events, they can improve their understanding of the risks and plan how to respond should certain risks unfold. Conducting stress tests regularly to identify declining conditions as they occur will help prevent knee-jerk reactions to a liquidity shortfall and ensure action is taken before reaching a crisis situation.