Liquidity: The solutions are out there

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.

 
 

This Article first appeared in the January 2001 issue of the Callahan Report

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.

NCUA’s “Heads-Up”

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 than most.
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.

 

 

 

April 23, 2001


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