UFCU reclassifies deposits to reduce reserve requirements and recover non-liquid funds for lending and reinvestment.

by: David Austin

As interest rates appear poised to rise, credit unions must prepare their balance sheets for the inevitable impact on their liquidity positions. Credit unions have been able to position their balance sheets with excess liquidity for this low interest rate environment, but have neglected to access funds held at the Federal Reserve Bank to satisfy reserves, or to actively manage cash stored in the vault.

These institutions can easily create new and permanent revenue streams by transforming these funds into revenue-generating income. Rather than “sitting” on their underperforming assets, credit unions should consider new strategies to generate incremental levels of revenue.

For example, $1.83 billion, St. Joseph, Mich.-based United Federal Credit Union recently faced a liquidity shortage with $20 million tied up at the Federal Reserve Bank. UFCU offers its members an “Interest Plus Checking” product, which pays a high interest reward rate on balances up to the first $25,000. To capitalize on this high interest payout, several of UFCU’s members began using this product as their primary savings account. However, as members began feeling the sting of the financial crisis, fewer deposits came in and withdrawals increased, putting a strain on the institution’s liquidity.

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