Do You Have Enough Liquidity?

By Mike Schenk01.10.2018

Depositories, like other businesses, must have the capability to meet short-term financial demands without significantly sacrificing earnings or capital in the process. If meeting big deposit outflows would cause your credit union to liquidate securities at a loss, significantly increase expensive borrowings, or force big increases in deposit yields, you might have a problem.

Liquidity has clearly been tightening recently, and it’s likely to tighten further in the coming months. With members increasingly focused on borrowing, credit unions have been replacing shorter-term, liquid investments with longer-term, illiquid loans. In fact, liquid surplus funds (the sum of cash and investments maturing in less than one year) have declined from 18% of assets in 2012 to just 13% of assets today.

Credit union loan growth outpaced savings growth in each of the past five years. The movement’s aggregate loan-to-savings ratio increased from a cyclical low of 69% in 2012 to a high of 80% as of midyear 2017. The current reading is inching toward the 83% modern-day peak recorded at year-end 2007.

Don’t be fooled by the first few months of activity you see in 2018. If history is a good guide, loan growth will be weak in the first quarter as members pay down holiday debts. And savings growth will be strong because members will be depositing tax refund checks. But that will change dramatically as the year wears on. We expect overall loan growth to approach (if not exceed) double-digit rates this year. So, loan-to-savings ratios will climb later in the year—perhaps dramatically.

(via Directors Newsletter)