As rates continue to rise, credit unions re-examine traditional and alternative sources of funds.
Let’s face it, these are tough times for managing liquidity. Credit unions are trying to strike the right balance between having too many liquid assets or too few. During the low-rate environment of the past few years, loans grew at a faster pace than shares, a scenario likely to continue as rates rise. In addition, cash and short-term investments have seen a steady drop since 2012, reducing one common source of liquidity.
Credit unions already are experiencing the effects of a rising rate environment—loans and investments extending, funding pressure on rate-sensitive deposits, and fewer bonds available to sell at acceptable prices. With the Fed raising rates, liquidity problems aren’t going away. Members who were debating taking out a mortgage or buying a new car are now rushing to fill out the application before rates climb further. Members with maturing CDs are starting to shop around for higher rates, something we haven’t seen since before the crisis. To make matters worse, rising rates are causing the market value of bonds held in investment portfolios to fall, sometimes substantially.
As a result, demand for liquidity is growing. So, the question is what liquidity options are available to credit unions?
Traditional Liquidity Options
Let’s start with the traditional route, which include familiar liquidity sources many credit unions are already using:
- Borrow overnight or term products from your corporate credit union. A possible drawback is a limited credit line.
- Borrow from the Federal Home Loan Bank. This option requires acceptable collateral and the purchase of FHLB stock.
- Increase member deposits through share or CD specials. This can be an expensive tactic and takes time to acquire a significant amount of funds.
- Sell securities. It might not be the best time to sell, especially if your board or senior management doesn’t agree to a potentially large loss.
Alternative Liquidity Options
While traditional liquidity sources are always appropriate, the current financial environment calls for some creativity. Your credit union may benefit from alternative liquidity options such as these:
- Issue certificates through a certificate of deposit brokerage program. Consider a comprehensive CD program. Products like the SimpliCD that’s offered by many corporates allow credit unions to issue and purchase certificates in a marketplace along with thousands of other credit unions. A brokered CD program offers convenience and a centralized method to raise funds quickly and efficiently as liquidity needs dictate. Look for a high-quality program with no fees, the ability to settle large blocks of certificates using future settlement and automatic monthly interest payments. SimpliCD data from 2017 shows considerable growth in certificate issuance, with total credit union issuance through the program reaching $4.15 billion, with 339 active credit union issuers.
- Leverage a loan participation platform. An online marketplace provides opportunities for credit unions to buy, sell or manage their loan portfolios. A loan participation platform like LoanStreet can help credit unions of all sizes manage liquidity and concentration risks. Today, large credit unions continue to grow and generate more loans while smaller institutions often have excess liquidity. Leveraging loan participations enables selling credit unions to keep their cost of capital low, while at the same time allowing buyers to place better interest earning assets on their balance sheets so that they can continue to serve their members.
A strong loan participation platform offers the added benefits of automated reporting and payments from a single point of contact, standardized agreements, increased capital access and 24/7 retrieval of historical records with CECL-compliant architecture. Whether a credit union wants to reduce capital constraints or boost loan revenue, a comprehensive program provides the tools to buy, sell and manage a loan portfolio within a single platform. A loan participation program can help move liquidity to the “just right” area, while also meeting members’ demands for loans.
Liquidity remains a top concern in today’s uncertain times. Fortunately, there are many options available to credit unions to stabilize and balance liquidity, whether it’s choosing to take a more traditional route or opt for an alternative solution.
Scott Wood is a portfolio strategist with Vizo Financial Corporate Credit Union, Greensboro, N.C.
If you’re interested in credit union financials, you might benefit from attending CUES School of Applied Strategic Management, slated for May in Orlando.