June 13, 2014
With the Fed’s trimming of asset purchases along with a recovering economy, there will be some upward pressure on credit union’s share rates. The excess liquidity that many credit unions have today may be in jeopardy tomorrow. Remember, the surge in deposits from our recent recession is a two-way street. Liquidity may be up now, but it’s eventually going to go down.
Indeed, for some credit unions, liquidity that came in during the recession years has already started to flow back out to Wall Street. Another, and perhaps bigger, outflow of liquidity will happen as rates increase and rates on term deposits become more attractive than non-maturity accounts, such as savings accounts and money markets.
With all the concerns in regard to liquidity, credit unions, in particular, are in a good place as the economy recovers for some key reasons:
Funding strategies/more solutions – Credit unions are more experienced (battle tested) and comfortable deploying local and non-member funding tactics and strategies. One such tool that can assist credit unions with their local funding activities is pricing models. They help create structure and discipline in the funding activities. Plus, there are more readily available solutions, such as referred CDs by brokers or listing services/rate boards, tailored to match off with your funding objectives. Whether you are sensitive to term, structure (callable/bullet or fixed/floating coupons), or a member/non-member blend, there is a vendor and a solution.
Cannibalization/marginal cost of funds – Credit union CFOs are more in tune with the real (marginal) cost of running local specials. There are some great tools available to help compute marginal cost of funds, such as a cost-of-funds calculator. It has been years since you had to be sensitive to the CD rate sign in your lobby or on your website. However, moving forward you need to be aware that there may be some acute rate sensitivity by a portion of your member base—and you need to be prepared to handle that and be able to react if cannibalization or runoff occurs.
Better balance sheet management – Credit unions will be managing interest rate and liquidity risk using all the tools available to them, including leveraging longer-term CDs, provided by "non-member" deposit resources; borrowing on lines of credit from corporates or obtaining Federal Home Loan Bank advances. CUs can use any of these vehicles as a way to invest excess funds or to bring in funds to the balance sheet.
Less pledged securities – Pledging collateral should be reserved as a last resort for securing loans from your corporate or Federal Home Loan Bank. Although securities can be a great source of liquidity and pledging, it should be well understood how a potential depreciation in market value will limit your secured borrowing lines from your corporate or the FHLB.
We believe a portion of your shares are at higher risk this year. So if liquidity becomes an issue, be sure to evaluate all the tools at your disposal to accomplish your objectives and to maintain the efforts of keeping your overall cost of funds at a reasonable rate.
We recommend a proactive approach in using both dynamic member deposit strategies and complementing non-member funding solutions to accomplish the objectives of mitigating cannibalization, reducing marginal cost, conserving collateral, and maintaining a local presence without turning local members’ deposits into hot money!
Your comments and feedback are always appreciated.