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Liquidity Risk: Loan-to-Share Ratios Are Moving Up

October 17, 2014

Throughout the sustained, low interest rate environment, many credit unions have become flush with non-maturity deposit funds, while also experiencing lackluster loan growth.  In other words, liquidity risk hasn’t necessarily been at top of mind.

However, as the economic landscape shifts and murmurings of an increase in government interest rates grow, the issue of liquidity may become an increasing concern once again.  According to June 2014 NCUA Aggregate data, loan growth (on average) continues to outpace share growth.  What if this trend continues and/or accelerates?

NCUA Aggregate Data Table

One thing to consider is analyzing how your members’ average balances have evolved since the last economic rate cycle back in the summer of 2007 when short-term rates were at 5%.  Key areas to address include:

  • What would my liquidity position look like if members reverted back to historical average balances?
  • What options do I have available, and what are the financial implications of those options, if the above scenario caused a stressed liquidity position?
  • As discussed in earlier blogs, the mix and cost of your deposits will also change as rates rise.  See our post on Isolating Interest Rate Risk with a Static Balance Sheet for more detail on this

While it may not feel like a problem today, highly successful credit unions are continuously looking forward and staying ahead of the curve.  Take the time to understand your liquidity position today and the threats and opportunities of tomorrow so that when the future is realized, you’ll be better prepared.

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