Maintaining Liquidity through a Changing Interest Rate Environment

When interest rates are low or falling, as they have been since June of 2000, credit unions often see an influx of loans and shares. For that reason, credit unions must apply prudent allocation techniques so that if interest rates rise, they won't be locked into low liquidity or small returns.

 
 

When interest rates are low or falling, as they have been since June of 2000, credit unions often see an influx of loans and shares. For that reason, credit unions must apply prudent allocation techniques so that if interest rates rise, they won't be locked into low liquidity or small returns.

Since much of their increased loan activity has been refinancing, credit unions have ended up with very little balance sheet loan growth. For credit unions that have had significant balance sheet loan growth though, an effective technique is to use new borrowings to extend liabilities. By doing this, credit unions ensure that they will have adequate funding for a long period of time instead of relying on short-term share accounts that could decrease if the market improves.

The graph below demonstrates that credit unions have been increasing their borrowings despite the double digit share growth they've had since June 2001.

 

 

 

Oct. 6, 2003


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