Is a Liquidity Crunch Coming and are Credit Unions Prepared?

Economic factors are tightening the strings on credit union liquidity. A secondary market can assist credit unions in managing their liquidity.

Just as Hurricane Ivan has left its mark on the southeastern shore line, external economic factors are affecting the balance sheets of credit unions. Economic conditions continue to impact credit unions and their management of liquidity. Credit unions now are not only adjusting to a rising interest-rate environment, but continual increases in member loan demands, along with consumer spending, are tightening the strings on credit union liquidity.

As reported on Callahan and Associates’ website on Sept. 6, America’s 9,406 credit unions reported a rise in loans outstanding of 4.1 percent from the first quarter of this year. These loans, led mostly by real estate and auto lending, topped $403.4 billion at mid-year. Also during the second quarter, credit unions increased their borrowings by 2 percent to $11.7 billion.

The difficulty in managing the change to liquidity comes partly in gauging whether it’s of cyclical or seasonal nature. There are many economic indicators predicting we are seeing a cyclical shift, at the same time a seasonal shift is typically expected.

During the first half of this year, credit unions were purchasing investment products in record volumes. Liquidity was plentiful. But in late spring and well into the summer months, the economy gained momentum: interest rates started climbing and liquidity in the credit union system showed signs of drying up faster than many years prior.

Based on Callahan figures from June 2003 to June 2004, loan growth is up 11.7 percent, while share growth lagged at 5.5 percent – magnifying the need for liquidity. This need for liquidity is further evidenced by the .3 percent negative growth in investments during the same time period.

Seasonal shifts in liquidity are fairly predictable. The summer months historically produce large outflows of liquidity due in large part to vacations and back-to-school costs. However, this year, liquidity pressures surfaced in May – about one month earlier than usual. This indicates a cyclical trend, as economic recovery played a large part in the liquidity drains because of the consumer loan increase, as mentioned above. Plus, loan-to-savings ratio, the measurement credit unions use to indicate how much of their deposits are out on loan, is now above 72 percent – another factor that supports this cyclical trend. During a seasonal trend, this ratio is usually lower.

“This strong cyclical trend especially took hold at the end of the second quarter,” said Karen Pease, managing director, Charlie Mac. “Credit unions are now facing some liquidity challenges that have nott been around for several years.”

One way credit unions can manage liquidity is by using the secondary market for help in clearing loans off their balance sheet. This option provides credit unions a tool in their asset/liability management. It also provides regulators with a comfort level that credit unions have adequately addressed their liquidity policy and procedures.

While external economic factors are continually changing, credit unions can at least know they have a secondary market available to support their needs.

For more information on Charlie Mac – a secondary market investor exclusive to credit unions – contact your corporate investment representative.



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Sept. 20, 2004


  • This is a well done, comprehensive Article. For the past two years of research, I''ve never find an article like this. I will definately recomend fellow researchers to turnt to it.