Loan growth has outpaced deposit growth over the past few years and on-balance sheet liquidity levels have been declining. Wholesale funding levels are on the rise and deposit attrition levels continue to increase. Undeniably, liquidity is under pressure and regulators are taking notice. Now is a good time to take your liquidity process to the next level.
Based on experiences gleaned from working with credit unions throughout the country as well as valuable interaction with the National Credit Union Administration, we have identified solid ways to improve your liquidity process to help exceed regulatory expectations and, more importantly, give your credit union more flexibility in managing the balance sheet to improve margin.
Follow these five steps to develop a stronger, more strategically focused liquidity process:
1. Identify Your Liquid Asset Cushion
Shifting cash and security cash flow into loans can be a fruitful strategy to protect and increase margin when rates are low. However, doing so can inadvertently trigger a regulatory concern. Management teams must identify what liquid asset “cushion” is appropriate for their business model and risk appetite (a recent focus in many exams). This cushion will depend on a number of factors.
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