May 1, 2024—Managing a credit union’s exposure to interest rate fluctuations and maintaining sufficient liquidity buffers is crucial for ensuring stability and smooth operations, and for safeguarding depositors’ interests. Given the ongoing liquidity stresses in the economy, it is no surprise that liquidity management remains a primary focus for credit unions and their regulators. As the NCUA detailed in its Letter to Credit Unions on January 23, 2024, liquidity risk management will be a focus of the agency’s 2024 examination program. In consultations with our ALM Modeling clients, we have already seen a renewed emphasis on liquidity issues.
In its January 23 letter, the agency stated, “Examiners will review the credit union’s policies, procedures, and risk limits, and also evaluate the adequacy of the credit union’s liquidity risk management framework relative to its size, complexity, and risk profile.” They are expected to ask the following questions:
- How well does your liquidity monitoring systems measure liquidity risk, and how often these measures are reported to your ALM Committee and board members?
- How stable is your deposit base and how well are more volatile funding sources monitored?
- Is the amount of your short-term liquid assets adequate given the composition of your current balance sheet?
- How diverse are your liquidity sources, and how easily can they be tapped in the event of a liquidity crisis, and do you have a contingency funding plan?
Perhaps most importantly, examiners will focus on forecasting asset flows given your projected budget, and looking to see if liquidity remains adequate in the short term. For EasCorp’s ALM Modeling clients, we have been developing models based on how current liquidity changes given a member’s growth assumptions for the next twelve months. From that base scenario, we can create alternative stressed scenarios that change these assumptions and observe the impact on liquidity.
A credit union should include liquidity monitoring and contingency planning as part of its interest rate risk management program. EasCorp provides an analysis of a member’s liquidity policy as part of its ALM Validation Services. If you would like an expert, independent view of your entire modeling program focused on the reasonableness of your results given your modeling assumptions, please don’t hesitate to contact us.