What’s Your Credit Union’s Liquidity Strategy

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Compliance preparations for the National Credit Union Administration’s new emergency liquidity rule must have been completed by March 31 2014.

The liquidity rule sets up three-tiered emergency liquidity requirements for credit unions with less than $50 million in assets, between $50 million and $250 million in assets, and more than $250 million in assets.

Federally insured credit unions (FICUs) with less than $50 million in assets must maintain a basic written emergency liquidity policy but will not be required to take further action. All FICUs with assets of $50 million or more are required to develop contingency funding plans describing how their credit union will address liquidity shortfalls in emergency situations. FICUs with assets of $250 million or more would be required to have access to a backup federal liquidity source for emergency situations.

Why wouldn’t credit union’s with less than $250 million in assets not want to have access to a backup federal liquidity source such as the discount window or CLF for emergency situations?

The final rule does not include the Federal Home Loan Banks (FHLB) as an acceptable source of emergency liquidity, although eligible credit unions required to meet the federal source provisions would be free to borrow from a FHLB for nonemergency purposes. Without the FHLB, credit unions have two options to ensure a federal liquidity source for emergency situations: Becoming a member of the NCUA’s Central Liquidity Facility (CLF) by subscribing to CLF stock or access to the Federal Reserve’s discount window.

I strongly supports the use of the home loan banks for liquidity.

Why be concerned now about liquidity when most credit unions are still awash with funds resulting from a flight-to-safety fund inflows and loan portfolio outflows due to lack of loan demand?

• Rising rates typically are used to manage economic recoveries. so it is likely rising rates will be accompanied by a return of flight-to-safety funds to the market and a spike in loan demand, putting many credit unions back in the tight liquidity environment of a few years back.

• Many credit unions have rate floors under their variable rate loans.  As rates move up, rates on these loans won’t move for a while. But your cost of funds will.  The result is a compressed net interest margins or NIM

The objective of a viable liquidity policy and strategy is to provide a framework to minimize the adverse effects of a significant and sustained liquidity crisis.  This can result from changing economic or interest rate conditions, deposit outflows, unusually strong loan demand, intense competition, an international crisis, or any other factors that can deplete the liquidity of the credit union.

In the event of a serious and sustained liquidity crisis, various strategies, of which some would be considered preventative and must be implemented prior to the onset of a crisis.  Other strategies are reactive and may be implemented immediately.   The strategies will differ in terms of the implementation time, costs, risks, financial implications and regulatory consequences.

The first place to look for sources of liquidity is within your own balance sheet. More

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3rd Party Due Diligence

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To expand their services and product offerings, credit unions are increasingly outsourcing functions and programs through collaboration with third parties.  Third party relationships are essential and can enable credit unions to become their members’ primary financial institution.  That said, not managing and controlling these relationships can result in unanticipated costs, legal disputes, and financial loss.
The regulators goal is to ensure credit unions clearly understand the risk they are assuming and balance and control these risks considering the credit union’s safety and members’ best interests.

The vendor due diligence objectives for credit unions are to:

  • Ensure that outsourced relationships are initiated based on a sound business case and comprehensive due diligence in the selection process.
  • Ensure that outsourced relationships are effectively managed by providing for consistent, risk focused controls and processes.
  • Ensure that the credit union is in compliance with regulatory guidance and requirements pertaining to outsourced relationships.

Credit Unions can achieve these objectives by maintaining an active vendor management oversight function.  Specific practices should be supported by guidelines and checklists that ensure that vendor performance is monitored, contractual requirements are in place and regulatory requirements are met.

Herein is an overview of the key areas when developing a vendor due diligence program in your credit union:

  • Identifying key vendors and their risk levels;
  • Gathering information for due diligence reviews;
  • Conducting initial and ongoing reviews;
  • Tracking and documenting; and
  • An in-house  compared to an outsourced programs.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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