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Six Questions CFOs Are Asking About Liquidity

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Consumer confidence hit a nine-year high in November as consumers’ views on both economic conditions and the labor market improved (Source: Wall Street Journal). Many credit unions have enjoyed increasing loan-to-assets, as have their competitors. Even if interest rates don’t increase, many decision-makers with high loan-to-assets are grappling with questions such as:

  1. Do we have sufficient and cost-effective liquidity options to continue to handle robust loan demand?
  2. How tight is liquidity for our geographic and digital competitors?
  3. If our competitors’ liquidity is tightening, how can that impact our ability to attract cost-effective funds? How can it impact our interest rate risk?
  4. If we use CD promotions to meet liquidity needs, how much cannibalization are we willing to accept?
  5. Now that liquidity is tightening, how comfortable are we with our intended deposit strategy if rates were to rise?
  6. What do we need to do now to dust off the cobwebs and get great at attracting sufficient, cost-effective deposits?

It is not too soon to begin strategizing about this. Make sure to test various options and understand the interest rate risk impact as well as the marginal cost of funds. Keep in mind, your liquidity planning can be disrupted by desperate competitors.

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Consumers Shunning Risk

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The question that many credit union leaders are asking themselves lately is, how far do we reach for yield?  With 10-year Treasury Rates rounding near 3% recently, how far can the balance sheet be pushed to make up for a squeezing margin?

Consumers at large are facing a similar dilemma when it comes to managing their own balance sheet.  How much risk is too much?  And with the world turning on its head, with perceived threats of war on the Korean Peninsula and dark concerns about the financial stability of European markets, that question is becoming harder to answer.  Even as consumer confidence is up on news of positive job forecasts, the Dow has tumbled below 10,000—not crossing that threshold since February 8th of this year (Dow Falls Under 10000 as Risk Is Shunned, WSJ, 5/25/10).

As the world continues to become more complex, and as ripples from the financial crisis and new developments in world affairs unfold, be mindful of consumers’ tendency toward safety.  While many credit union leaders cannot imagine another influx of low-cost funding, the perceived chaos in the world around the consumer could theoretically cause just that.  Consider stress testing what could happen if you experience another flight to safety of similar (as well as greater) magnitude combined with anemic loan demand to see the impact to your net worth ratio.  If net worth is at high risk of dropping below Well or Adequately Capitalized, identify viable steps you can take to be prepared.