Samantha: Hello,this is Samantha Shares.
This episode covers the National Credit Union Administration's Advisory on
Liquidity Risk published on January seventeenth, twenty twenty-four.
The following is an audio version of that letter.
This podcast is educational and is not legal advice.
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And now the advisory on Liquidity Risk Management
Over the last year, the credit union systemâs performance has
been stable and resilient overall.
The, agency, however, continues to see growing liquidity
stresses within the system.
For those credit unions experiencing lower share growth, high loan growth, and
declining levels of available liquidity as a result, liquidity management needs
to be conducted with the necessary frequency and sophistication of methods
used, closely monitored by the credit unionâs senior management, and one
of the board of directorsâ top areas over which to provide good governance.
In general, the key areas of focus for credit unions to
manage liquidity effectively are:
Managing and forecasting cash flows under normal operating and stressed conditions.
Sensitivity analyses of cash flow and deposit assumptions are of heightened
importance given recent trends in deposit movement, which underscores the importance
of having a strong liquidity policy and viable contingency funding plan.
During periods of uncertainty, it is imperative credit union management
identify and measure its sources and uses of funds, reevaluate assumptions
and risk relationships, and modify the frequency that it projects cash flows.
It is also prudent to ensure staff have relevant experience
and training in managing liquidity in various market conditions.
Controlling asset composition such as lending quality and volume, including
pricing, limits for lending personnel and loan types, and originating
loans eligible for future sale.
Balance sheets with high levels of credit risk or long duration with an inadequate
amount of short-term liquid assets will require management to implement a
more robust risk management framework.
Structuring liabilities to be congruent with asset growth.
Liabilities that can be relied upon for funding under a broad range of
macro and microeconomic conditions are considered more stable and
contribute to reducing liquidity risk.
Examples of stable funding sources include regular shares and share drafts.
More volatile funding sources, such as brokered deposits and uninsured
shares, should serve specific needs and be well controlled and monitored.
Developing governance and monitoring structures suitable for the credit unionâs
size, complexity, and financial condition.
Governance structures should clearly state roles and responsibilities, create
appropriate levels of accountability and ensure the segregation of duties.
Liquidity monitoring systems must adequately identify
and quantify risk exposure.
These systems must also ensure that reporting processes communicate accurate,
timely, and relevant risk information.
Maintaining diversified liquidity sources that can be
accessed in various situations.
This funding diversity includes having access to at least one contingent
federal liquidity source during times of financial emergency and
distressed economic circumstances.
Section 741.12 of National Credit Union Administration regulations requires
access to either the Central Liquidity Facility (C L F) or the Federal Reserveâs
Discount Window (Discount Window) for all credit unions with $250 million or
more in total assets; however, all credit unions should consider having a federally
sourced liquidity backup when other market funding sources prove inadequate.
The ability to access funding at a predictable rate through the C L F
or Discount Window should be part of credit unionsâ contingency liquidity
risk management plans under a range of scenarios, not just in times of crisis.
The agency will continue to ensure credit unions conduct liquidity
and asset-liability management planning to address current
challenges and future uncertainties.
The agency website contains a comprehensive Liquidity
Risk Resources page.
The Examinerâs Guide chapter on liquidity also contains valuable
information to support credit unionsâ efforts to strengthen liquidity
positions and risk management.
In 2024, the agency will host webinars to provide more information
for credit unions on liquidity risk management approaches and expectations.
Resources:
Several Resources are cited in the advisory and are listed in
the show notes for this episode.
This concludes the Liquidity Risk Management Advisory.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.