All in the Family: Creative Liquidity Options Within the Credit Union Community

What a difference a year makes. From mid-2003 to mid-2004, when the fed funds rate remained at 1%, credit unions were flush with liquidity. And many worked to successfully position their balance sheets to take advantage of this historic increase in available funds, as evidenced by record credit union balances. Jump forward to fall 2005. As credit unions watch the fed funds rate continue to shift upward – 12 consecutive rate hikes since mid-2004 – they find themselves in need of tools and liquidity sources designed for times of tightening liquidity. As members request more loans and withdraw more shares, credit unions must ensure they have the liquidity needed to meet these demands. Traditional liquidity sources have proven successful for many credit unions. Special CD offerings, early redemption of certificates, lines of credit and short-term borrowing have all been used effectively in managing credit union liquidity. However, in today’s tight-liquidity environment, more credit unions are looking for additional methods of securing needed liquidity – and they are finding them within the credit union industry. Increase borrowings Corporate credit unions can provide a ready source of liquidity for credit unions. After all, providing for all types of liquidity is a major function of the Corporate Network. While many credit unions effectively use their corporates as an overnight or short-term lender, more are discovering an added value in corporates’ longer-term borrowing products. Expand FOMs In an effort to increase deposit growth, some credit unions are growing their business by increasing their fields of membership. Whether credit unions are working with regulators to expand their geographical reach or simply adding more select-employee groups, more members can result in more liquidity. But credit unions must manage this carefully – an expanded membership will generate more loan demand, and ultimately could add to the liquidity crunch. Sell loan portfolios Making loans to members continues to be what credit unions do best. Yet, holding loans on the balance sheet can lead to challenges in a tightening liquidity environment: managing interest-rate risk associated with long-term, fixed-rate loans; keeping liquidity available for other needs; and maintaining sound ALM practices in the eyes of regulators. To address these challenges while keeping the liquidity pipeline flowing, many credit unions are selling their loan portfolios to secondary market outlets. By selling loan portfolios, credit unions can increase liquidity and lessen risk management, while also positioning themselves as their members’ primary financial institution. It’s the nature of liquidity to change quickly and fluctuate often. This unpredictable characteristic has always added challenges to liquidity managers. Liquidity levels are influenced by many things – economic factors, consumer confidence, loan demand, savings levels, and even seasonal factors. Today’s successful credit unions continually watch over their liquidity positions while keeping an eye out for additional ways to meet current needs. And many are finding the options they need right within the credit union community.