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Liquidity: Another Thing to Worry About?

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Imagine a scenario where it is difficult to find deposits. Suppose the stock market is booming and members are taking funds out of your credit union. Even if you don’t have liquidity issues, what if your competitors do and deposit rates are higher as a result?

Is this hard to imagine given all the liquidity you have now? Consider the relationship between the change in the Dow Jones Industrial Average and credit union deposit growth. In the past, strong stock markets have typically been accompanied by reduced deposit growth. This pattern has yet to repeat in 2010, but what if it does? What would your liquidity position be if you lost the funds you have gained in the last year?

cu deposit growth and dow jones percent change

Also consider that this time your external sources of liquidity may not be available. What if a new corporate credit union structure included a reduced ability for corporates to lend funds? How about the FHLB? What if they are not able to lend funds at the level they have in the past?

The recently finalized Interagency Policy Statement on Funding and Liquidity Risk Management underscores this importance of liquidity planning. This policy statement specifically requires financial institutions have contingency funding plans (CFPs). We recommend you prepare for potential future periods of reduced liquidity now rather than wait for your regulator to request a CFP, or worse yet, to face a period of tight liquidity without a plan.

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Bankruptcies on the Rise and the Evolving U.S. Debt Burden

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Building on our last post on U.S. household debt being reduced primarily by default, and with consumer credit drying up, more and more struggling consumers are turning to bankruptcy as the only solution to solve their debt burden.  There were 158,141 U.S. bankruptcy petitions filed last month, a 35% increase over February’s figure.  Moreover, filings in a dozen states increased by double-digit percentages in the first quarter of 2010 compared to 2009 monthly averages (Personal Bankruptcies Hit a High and May Keep Rising, Time.com, April 5, 2010).

With a steady unemployment rate, and even an increasing “underemployment” rate ticking up to 16.9% according to the BEA, how long will the bankruptcy trend last?

Perhaps even more interesting is the vast increase in the debt burden causing the wave of bankruptcies.  According to the Federal Reserve, personal borrowing in the U.S. is ten times greater than in 1960 if you adjust for inflation.

During your strategic planning process, it may be worthwhile to consider the monumental increase in U.S. consumers’ debt burden over time.  What could happen if consumers become more and more debt averse?  Will the challenges facing adult consumers today socialize younger generations for a thriftier lifestyle?