This Article first appeared in the January 2001 issue of the Callahan
With the economy
booming, the majority of your members have been spending and borrowing
rather than saving. When you’re not taking in much in new deposits
and your existing members are making share withdrawals and asking
for loans to buy new homes and automobiles, you need to look elsewhere
for new sources of liquidity.
Last month NCUA, in letter 00-CU-13, emphasized the importance
of managing liquidity risk. The letter states that, “Sources
of liquidity are found in core deposits, investments and borrowing
arrangements.” The letter goes on to explain that liquidity
can also be found in the loan portfolio itself. The residential
mortgage market has developed over many years to where mortgage
loans can be readily sold into the secondary market. Advances in
the asset securitization markets have also led to other consumer
credit products auto loans, credit cards, etc. becoming a more ready
source of liquidity.
What are Your Sources of Liquidity?
Credit unions need to have the funds available to lend to any qualified
member looking to buy a home or automobile. Liquidity concerns should
not hamper a credit union’s ability to serve its members. Credit
unions must look beyond current cash and short-term investments;
there are other sources available that should be considered as part
of the long-term strategic business plan.
We should not forget the “Y2K” event. Credit unions built
primary liquidity in the form of cash and short-term investments,
but most created contingency plans that looked at alternative liquidity
sources. Many of those sources are still available, and additional
potential sources can probably be added. However, corporates are
still the primary liquidity provider for most credit unions.
Liquidity Solutions within the System
Many corporates offer a wide range of loan products designed to
give credit unions flexibility in meeting the borrowing needs of
their members. WesCorp and other corporates have developed broad
loan services because we want to be prepared to assist credit unions
in the event of any liquidity shortfall.
Recently, credit unions have begun using the sale of loan participations
to generate additional liquidity. A few corporates have developed
loan participation programs. WesCorp’s new loan participation
program with which I’m most familiar is a little different
WesCorp Capital Corporation (WesCap), a wholly owned subsidiary,
acts as a principal to the transactions on either a recourse or
non-recourse basis. Sellers have immediate access to a reliable
and consistent source of funding, and buyers have access to a pool
of assets where WesCap has already done extensive due diligence.
Buyers can be assured of acquiring participations in a standard
high quality pool of credit union-generated loans.
WesCap will also purchase existing whole loans and commit to purchase
on a forward delivery basis so credit unions can manage their loan
pipeline. Initially, this will focus on auto loans but will be extended
as the need arises. WesCorp will monitor the performance of these
assets and provide extensive reporting through a new “master
servicing” system. In fact, a credit union can use this report
to analyze its entire loan portfolio and then select the loans most
suitable for sale.
Have your Plan in Place before the Need Arises
Credit unions should have a clear plan in place for tapping sources
of liquidity before they need it. When a credit union needs liquidity,
corporates are committed to providing a comprehensive range. From
simple short-term loans to long-term remedies, our goal is to provide
solutions that fit an individual credit union’s needs. That’s
why we’re in business. I urge all credit unions to find out
what’s out there as far as liquidity solutions. Learn all you
can. Talk to your corporate and others. Ask for assistance formulating
your plan. Know all the options and be prepared to choose the solution
that will work best for you.
In my experience, liquidity is not a problem for those who prepare.