Let’s face it, these are tough times for managing liquidity. Credit unions are trying to strike the right balance between having too many liquid assets or too few. During the low-rate environment of the past few years, loans grew at a faster pace than shares, a scenario likely to continue as rates rise. In addition, cash and short-term investments have seen a steady drop since 2012, reducing one common source of liquidity.
Credit unions already are experiencing the effects of a rising rate environment—loans and investments extending, funding pressure on rate-sensitive deposits, and fewer bonds available to sell at acceptable prices. With the Fed raising rates, liquidity problems aren’t going away. Members who were debating taking out a mortgage or buying a new car are now rushing to fill out the application before rates climb further. Members with maturing CDs are starting to shop around for higher rates, something we haven’t seen since before the crisis. To make matters worse, rising rates are causing the market value of bonds held in investment portfolios to fall, sometimes substantially.
As a result, demand for liquidity is growing. So, the question is what liquidity options are available to credit unions?
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