Keeping Balance in the Current Environment

As a turbulent economy provides many worries for most financial institutions, credit unions have a unique opportunity.


Last Friday, across the CNN bottom page scrolled the news that  “Fed Funds futures have a 100% probability of a 75 bps cut.” Later in the day, the Federal Reserve announced a plan to provide up to $200 billion more into credit markets in an effort to ease liquidity constraints.

As major public institutions struggle to keep market confidence, the majority of Americans can only view events with increased anxiety about their own future. To keep faith with your members, your credit union does not have to be under prepared during this time of volatility and uncertainty.

As of year-end 2007, the credit union system had $200 billion in total investments of which $53.9m was in cash or short term, under 90 day instruments.

Historically, the first four months of the year are a time of seasonal inflows. Year end bonuses are being paid by companies across the country.  This is a time of opportunity, but given interest rate uncertainties, how aggressively should credit unions seek these funds. 

While liquidity is what every intermediary wants more of today, it raises the ALM issue of how do you keep your balance sheet in balance?  If I bid aggressively for the funds, will I be able to redeploy them in loans at a spread?  What if the Federal Reserve does lower rates aggressively, will these seasonal deposits just be hot money or the basis for an expanded relationship?

Can a credit union remain liquid and still achieving a decent return? Will I be able to attract new funds with special promotions, but still lower other share accounts to keep my cost of funds in line with the overall trend in market rates?

One advantage may be the positively sloped yield curve.  As the curve steepens, margin opportunities should increase. One likely outcome is credit unions will end up taking shorter-term deposits to fund longer-term loans and investments.  Taking prudent duration risk is an integral part of proper balance sheet management.

Knowing options and creating a portfolio of choices and actions will be key actions in the current environment.  Several of these strategies will be profiled in Using Investments as a Balance Sheet Management Tool on Thursday and in the Financial Solutions Symposium at the end of the month in Florida.