The Liquidity Awakening Has Begun

The Liquidity Awakening Has Begun

The recent rate environment has done wonders for many sleepy ALM programs, waking them up and inciting a resurgence of focus in the way credit unions monitor the interest rate risk exposure on their balance sheets. After 10 years in a static rate environment, this demanding rate cycle has forced credit unions to shake off the drowsiness and embrace a new perspective on their ALM programs.

As rate hikes have now halted, a new sleeping giant has emerged and settled into the forefront of the financial horizon – liquidity. As consumers are moving funds to higher yielding accounts, spending down pent-up cash for large purchases or even just inflation-driven increases to the cost of living, the results mean fewer deposits and tightening liquidity. For that reason, it has quickly become a primary point of interest in terms of balance sheet risk management.

The Renaissance of Liquidity Risk Management

Liquidity supervision has been evolving since the Great Recession when regulators and credit union management, alike, felt the need to upfit and revive historical liquidity ratio practices. Before this most recent liquidity crunch, the NCUA had been preparing behind the scenes for this event. In 2022, we experienced an increased request for projected liquidity reporting. If you are not familiar, this liquidity method takes a forward-looking approach to funds management, allowing the incorporation of balance sheet projections to flow through to liquidity management. The NCUA has increased its requests to incorporate forecasted liquidity into balance sheet management over the past two years. They recently issued a reminder on January 17 to reiterate liquidity risk management in an advisory statement. In addition, liquidity risk management was included in the NCUA 2024 Supervisory Priorities, further punctuating their immediate focus of liquidity management.

It is not surprising to see the NCUA publish two communications with liquidity in the same week, as the national federally insured credit union loan/share ratio rose to 84.8 percent in September. The last time we saw a similar level of such a high loan/share ratio was in the fourth quarter of 2018, when it reached 85.6 percent. For credit unions, tightening liquidity over the past year has been accompanied by a significant uptick of examiner requests for liquidity forecasting and stress testing.

This heightened level of focus is well warranted, and it is important to recognize that our current interconnected financial environment allows members to instantly transfer funds, which should cause a wake-up call for liquidity management. As the NCUA spells out in both recent communications, liquidity management has transformed from an insufficient historical ratio analysis to a proactive, forward-focused methodology using liquidity forecasting and stress testing.

Liquidity Forecasting

At Vizo Financial, we have developed our liquidity reporting since the Great Recession to not only comply with regulatory expectations, but to create a useful, customized report to fit the unique needs of individual credit unions. The ALM model houses the ability to forecast the cash flows and offers a perfect fit to leverage this existing system for liquidity planning. Liquidity forecasting has helped credit unions prepare by monitoring their beginning cash position and layering in the expected net cash flow by incorporating projected growth. This forecasting not only gives insight into the anticipated cash flow, but it also provides a holistic approach to the liquidity profile because, in addition to cash reserves and cash flow expectations, liquidity monitoring also aligns off-balance sheet liquidity sources. By combining all sources of available liquidity into the reporting, it allows for a full picture of liquidity in just one report, which is useful for liquidity planning.

Stress Testing

Stress testing has also gathered the attention of examiners, as they are seeking multiple liquidity scenarios. I must confess, when I began liquidity stress testing, I saw little value. If loans were rapidly increasing and shares were running out the door, the institution would stop lending to cover the deposit runoff. It seemed illogical to stress liquidity by these metrics. However, after preparing countless liquidity stress reports, I agree that this practice brings quite a bit of awareness to the liquidity program. It has the ability to prepare the credit union in the following ways:

  • It provides an understanding of just how dire the liquidity position can get and allows us to understand the trend of this position as the balance sheet shifts.
  • It helps us to realize the full liquidity position of the institution and the impact of other liquidity options such as selling investments, issuing non-member deposits, available LOCs and emergency lines.
  • It illustrates possible restrictions on available sources. For example, what if the full LOC is not available or there are not enough investments to pledge the lines needed?
  • It helps to identify if the institution is not comfortable with current availability.

The delicate state of the financial markets has brought about an awakening of progressive ALM practices, one where it seems forecasted liquidity and stress testing will remain a top priority for credit union managers and examiners in the foreseeable future. Much like the wake-up call with interest rate risk, liquidity risk has rapidly risen to a high priority. As you navigate your liquidity management for the next season, be sure to incorporate your forecasted balance sheet, be aware of all available liquidity sources and stress test the results for further planning. If you would like to discuss how the Corporate can help navigate your liquidity planning, please reach out to our ALM team at

Melissa Scott serves as Vizo Financial’s vice president of ALM services. In this role, she is responsible for managing and providing ALM reporting, modeling, validation and consulting services to credit unions. She is also responsible for providing ongoing training, support and education for ALM users, management and their board of directors. She also holds the designation of certified public accountant (CPA) and is a member of the North Carolina Association of Certified Public Accountants.