Liquidity remains a vital topic in the credit union industry in 2007. However, while the focus during the last two years was on how to get liquidity, now many of us are challenged with how best to manage the large amount of liquidity flowing into the network. If we avoid chasing yield and focus more on laying a firm foundation, we can allocate this newfound liquidity in a way that helps us avoid or minimize the next liquidity crunch.
When will that crunch be? While we don’t know the answer to that question, we do know that the liquidity crunch is cyclical and will surely come back around. If we are not ready when it does come, we may find ourselves forced to choose the lesser of two evils rather than selecting the best strategy from those available. This can result in a higher cost of funds, decreased net interest income (NII), and the destruction of investment ladders, among a host of other issues. Preparing for the full liquidity cycle now will help you through the next crunch.
Liquidity has a dramatic impact on strategic direction. By the same token, planning and decision-making will have an equally dramatic impact on how strategic objectives are achieved. The key to success lies in understanding the liquidity solutions available to your credit union, along with the impact those solutions will have on your bottom line, -- and then choosing the most appropriate. Controlling your environment in this way is part of the foundation for a healthier bottom line and ultimately happier members.
For credit unions that do find themselves cash poor, there are a number of strategies that may work. A favorite for many has been to sell or redeem investments. However, this can have serious drawbacks, resulting in sacrificing investment income or even a loss of principal. Before adopting any approach, there are always alternatives that are at least worth consideration. These may include borrowing funds either overnight or for term at fixed or variable rates, selling loan participations or whole loans, or even issuing CDs through the SimpliCD program.
In cases of excess liquidity, it clearly makes sense to look at the certificate rates of your corporate credit union. But if policy limits prevent any further such investments, the same resources used to generate liquidity can be used to invest excess funds – buying loan participations, whole loans, or SimpliCD – all can work as both an outlet for excess cash and a tool for increasing NII. Allocating this liquidity with the intent to structure your principal cash flows in a ladder can dramatically enhance your ability to manage the entire liquidity cycle, not just the liquidity-heavy side of it.
That there are so many ways to manage liquidity can be both comforting and confusing. Clearly, the bottom line is that in order to control your environment, you must understand your liquidity strategy, your liquidity needs, the liquidity options available to you, and how to plan now for potential problems later. WesCorp has made it a priority to assist credit unions in understanding, organizing, or just maintaining their liquidity positions. Our Liquidity Solutions Desk offers consultation with attention to specific needs, strategic direction, and the liquidity scenario faced.
WesCorp is America’s largest corporate credit union with approximately $29 billion in assets and more than 1,000 member/owner credit unions throughout the United States. If you would like to discuss your liquidity position with WesCorp, or just have a few questions you’d like answered, contact Jeff Merry, Liquidity Solutions Consultant, at (800) 442-4366, ext. 6588 or firstname.lastname@example.org.