CREDIT UNION LIQUIDITY MANAGEMENT

Transcription

1 Economic Forum October 3 5, CREDIT UNION LIQUIDITY MANAGEMENT Jeff Vorhees, Sr. ALM Analyst Topics of discussion Liquidity Risk Explained Liquidity Sources Liquidity Risk Management 1

2 Economic Forum October 3 5, Liquidity: Why does it matter? Liquidity Definition 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. Must be available and timely Must not be cost prohibitive Different than capital or net worth Solvency vs Liquidity 2

3 Economic Forum October 3 5, Cautionary Tales Cautionary Tales $32 Billion 4 th largest Bank failure Alt A loans with no documentation Infamous 10 Q 37% Brokered Deposits $1.85 Billion in NPAs, 40.56% increase $10.7 Billion in loans that could not be sold to the secondary market Depositors withdrew 7.5% of deposits 3

4 Economic Forum October 3 5, Regulatory Fallout Credit Union Liquidity Scenario Interest rates rise quickly leading to: 1. Pressure to raise dividend rates - Competition begins raising rates 2. Asset yields are slow to respond - High concentrations in long-term asset holdings 3. Large scale and rapid share withdrawals - Members begin spending and/or seeking higher yields - Pushing credit unions to find additional funding sources quickly 4

5 Economic Forum October 3 5, Liquidity vs Profitability No credit union has failed from too much liquidity but there is a cost Managers must achieve profitability Dividend Rates High rates keep shares but also lower cash balances Risks effecting Liquidity Credit Risk Market risk can effect the values of assets and liabilities Liquidity Risk Market Risk Credit risk can cause losses in reserves and lower equity capital levels Liquidity risk can involve a mismatch in asset liability maturities 5

6 Economic Forum October 3 5, Primary and Secondary Sources Primary Sources Share Deposit Growth Income from Loans and Investments Secondary Sources Sale of Securities Lines of Credit Committed Lines of Credit Diversity No Single Point of Failure FHLB Corporate- Secured and Unsecured Fed Discount Window Central Liquidity Facility 6

7 Economic Forum October 3 5, Non-Term Shares Regular Shares, Share Drafts, IRA Shares, Money Market Uninsured Depositors Business Deposits Deposit Concentrations Term Shares Advantages Cheap funding in current interest rate environment Products Negotiable Certificate of Deposit (CD) Balance Sheet Matching IRA CDs Strategic Planning Listing Service 7

8 Economic Forum October 3 5, Non-Member Deposits Brokered Involve placement by a broker Higher rate and considered volatile Regulators can limit amount based on capital Public Funds Competitive bidding process Economic conditions effect volatility Borrowings Leverage offers flexibility and increased profit potential Credit defaults combined with leverage can cause a rapid decline in liquidity levels Basel III framework assesses leverage risk effect on liquidity coverage Factors to consider: Optionality Maturity distribution Concentration 8

9 Economic Forum October 3 5, Investment Portfolio Investment portfolio serves as a source of liquidity Repurchase Agreements Collateral for Lines Portfolio Composition Treasury vs Municipal Bond Marketable Securities Maturity less than 90 days AFS vs HTM Primary Liquidity Ratios Fundamental Criteria 1. Loan/Assets 2. Borr & NM Dep/Total Shares & Liab 3. Cash & ST Invest/Assets 4. Liquidity Ratio (Uses/Sources) Guidelines <80% <5% >10% <90% 9

10 Economic Forum October 3 5, Supplemental Liquidity Ratios 1. Loans/shares 2. Contingent Liab/Cash & Investments 3. Net Liquid Assets/Total Liab & Shares 4. Volatile Liab/Cash and ST Investments 5. Growth in Volatile Liab/Assets 6. Investment Gain/Loss Ratio 7. Term Deposits/Total Deposits Guideline limits <100% <200% >5% <600% <15% >-3% <50% Liquidity: Examine your mix? Long-Term Assets Permanent Current Assets Fluctuating Current Assets Maturity Matching Strategy Conservative Financing Strategy Aggressive Financing Strategy Long-Term Sources Long-Term Sources Long-Term Sources Short-Term Sources Short-Term Sources S-T Sources Credit Union Strategy Equity L-T Debt CDs? Shares Credit Union Strategy Equity L-T Debt CDs? Shares Credit Union Strategy Equity L-T Debt CDs? Shares 10

11 Economic Forum October 3 5, Cash Flow Projection Liquidity Gap Analysis Ratio<90% Share runoff scenarios Fully funded important to consider 11

12 Economic Forum October 3 5, Basel Basel I formed from Basel Committee on Banking Supervision regarding minimum capital requirements Basel II provided revisions on capital held to guard against financial and operational risks Basel III resulted from financial crisis and focused on reduced leverage, stress testing, and capital adequacy Stress Testing 12

13 Economic Forum October 3 5, Stress Testing Regulatory Framework NCUA 13-CU-10 Developed from FFIEC Liquidity and Funding Guidance in March 2010 Process commensurate with complexity and risk profile Cushion of liquid assets Cash Flow Projections Stress Testing Diversified funding sources Contingency Funding Plan 13

14 Economic Forum October 3 5, Liquidity Policy Risk limits and thresholds Sufficient sources available to avoid point of failure Clear strategy and procedures Liquidity risk part of overall risk management process Management and BOD understanding ALCO timing and reporting Credit & Liquidity Collections procedures Strict or liberal Credit Policy Cash conversion cycle Past Due/Charge-offs 14

15 Economic Forum October 3 5, Contingency Funding Plan Required for Credit Union s >$50 million Credit Union s with assets >$250 million must have at lest one contingent liquidity source Member in Central Liquidity Facility FRB Discount Window Covers multiple risk areas including credit, operations, market risk, etc. Identifies triggers that occur from events or breach in limits Contingency Funding Plan General action plan for various scenarios Counterparty Failure Negative headline effecting reputation Management assigned various responsibilities Identified sources for recourse liquidity Loan and investment sales Participations sold Borrowings Significant value in going through the planning process 15

16 Economic Forum October 3 5, Liquidity: Make an action plan Establish goals Funding resources Early warning indicators Inadequate projected cash flows Increase in loan demand Decline from large depositors Action Plans Administration Use of wholesale funding Decline in deposits Strategic planning Include liquidity in strategic planning! Targeting balance sheet mixes Planning new volumes Planning new products 16

17 Economic Forum October 3 5, Liquidity Rating Update The addition of the S Component Reallocates ALM and IRR from L to S Questions? Jeff Vorhees, Senior ALM Analyst jvorhees@catalystcorp.org