Credit Union Liquidity
Contingency Funding Plans
Client Webinar Series
Randy Thompson, Ph.D.
Regulatory Expectations - CFP, § 741.12
• 2013 - NCUA issued rule - CFP, § 741.12 establishing requirements for
managing Liquidity in credit unions.
• March 31, 2014 all credit unions should be in compliance
Definitions
• Liquidity is a measure of the ability and ease with which assets can be
converted to cash. Liquid assets are those that can be converted to cash
quickly if needed to meet financial obligations; examples of liquid assets
generally include cash, corporate credit union accounts, short term
investments and back up lines of credit.
• To remain viable, a financial institution must have enough liquid assets to
meet its near-term obligations, such as withdrawals by depositors.
Definitions
• Cash and Equivalents
• Short term investments
• Back up lines of credit
Regulatory Expectations - CFP, § 741.12
“Accordingly, § 741.12(a) of the final rule requires these smaller FICUs to
maintain a basic written policy that provides a credit union board-approved
framework for managing liquidity and a list of contingent liquidity sources
that can be employed under adverse circumstances. Such a policy
establishes liquidity measures and associated benchmarks, a reporting
requirement to keep the board apprised of the institution’s liquidity
position, and a contingent source, or sources, of funding, such as a
corporate credit union or correspondent bank.”
Regulatory Expectations - CFP, § 741.12
“First, all FICUs should maintain a balance sheet cushion of highly liquid
assets as a basic element of liquidity risk management. It is essential for
FICUs of all sizes to hold an adequate safe guard of cash and cash
equivalents (such as short-term deposits and Treasury securities) on the
balance sheet continuously. A balance-sheet cushion affords an institution
time to avoid service disruptions and enter external funding arrangements if
necessary.”
Regulatory Expectations - CFP, § 741.12
“A second element of liquidity management is borrowing from market
counterparties, such as corporate credit unions, correspondent banks,
FHLBs, and repurchase agreement counterparties. The ability to borrow
from market sources requires having unencumbered assets that can be
readily pledged against a loan. Larger FICUs with greater potential funding
needs should have multiple stable borrowing sources and a clear
understanding of which assets can be pledged.”
Regulatory Expectations - CFP, § 741.12
The third element of protection is access to a federal emergency liquidity
provider: The CLF or the Discount Window. These providers exist to provide
backup liquidity in circumstances where on-balance sheet liquidity and
market sources prove inadequate. Like the market funding sources, the CLF
and Discount Window are both collateral-based lending facilities. The
Board believes that, to protect the NCUSIF, it is essential for FICUs with
assets of at least $250 million to have this third element of liquidity in place.
Regulatory Expectations - CFP, § 741.12
• Credit Unions grouped into 3 asset size groups
• Less than $50 million
• Written policy with limits, sources and reporting methods
• $50 million to $250 million
• Add requirement of multiple contingent lines and contingency funding plan
• $250 million or greater
• Add requirement for federally funded credit line & minimum of 3 distinct sources
Practical Liquidity Management
• Balance Sheet Liquidity Cushion - elements
• Cash
• Primary sources of liquidity
• Adequate for normal operations
• Not a primary source of income
Practical Liquidity Management
• Balance Sheet Liquidity Cushion - elements
• Short-Term Investments - < 1 year
• Secondary sources of liquidity
• Adequate for unanticipated variations in normal operations
• Not a primary source of income
Practical Liquidity Management
• Contingency Funding
• Back-up Lines of Credit
• Corporate lines
• FHLB
• Investment houses
• Commercial Banks
• Fed Discount window or CLF (credit unions over $250 mil)
Practical Liquidity Management
• Normal day to day operations
• Moderate deposit run-off
• Severe deposit run-off
• These three elements provide the foundation for your Contingency Funding
Plan
Practical Liquidity Management
• Normal day to day operations
• Normal, anticipated variation of deposit balances
• Net difference of outflows and inflows
• Outflows include new loans, withdrawals and other clearings
• Inflows include loan payments, investment cash flow and deposits
• Normal operations is typically sustained through your cash balances
Practical Liquidity Management
• Moderate deposit run-off and/or loan growth
• Increased lending volume
• Unanticipated deposit reductions
• This may happen as the economy improves and people move into other investments
• Typically in a quarter
• This liquidity challenge is typically funded through <1 year investments
Practical Liquidity Management
• Severe liquidity crunch
• Dramatic runoff of deposits
• Anticipate the loan production will be inhibited in this case
• Possibility of reputation risk and run on deposits is high
• Lines of credit are the primary line of defense in this case
Contingency Funding Plan
• Creating a CFP
• Step 1
• Measure the normal variation in cash flow
• Should be monitored monthly and updated quarterly
• Identify cash levels required to sustain that variation
Contingency Funding Plan
• Creating a CFP
• Step 2
• Determine the possible variation resulting from a moderate deposit decrease
• Typically 3% to 8%
• Look at historical variation at your credit union over past 3 to 5 years
• Consider hot money you have accumulated during the past three years
• Identify investment levels required to sustain that decrease
Contingency Funding Plan
• Creating a CFP
• Step 3
• Determine the potential variation resulting from a dramatic downturn in deposits
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Typically 12% to 25%
Look at historical variations in your market place
Consider the worst case scenario if the economy turns sour or your reputation is questioned
Be reasonable and realistic
• Identify back up lines of credit required to sustain that decrease
• For credit unions over $250 million this must include CLF or Discount window
Monitoring and Reporting
• Regulations require:
• Targets
• Monitoring
• Reporting
• These can all be accomplished through the Liquidity Tool
Considerations
• Liquidity management is a constant balancing act
• Inadequate liquidity can pose reputation risk and threaten your survival
• Excess liquidity can reduce yield and hamper ability to generate a profit
• Member behavior can differ with changes in the economy
• Requires regular monitoring and adjustment to match member behavior