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Funding & Liquidity Risk What Directors Need to Know
David Brehmer President/CEO
First Carolina Corporate Credit Union
David Brehmer • First Carolina Corporate Credit Union, President & CEO
• San Diego Postal Credit Union, President & CEO
• San Diego County Credit Union & Torrey Pines Federal Credit Union, Senior Management Positions & President of CUSO
• Chairman - Board of Managers for CU Business Group
• Treasurer - Board of Directors for Latino Community CU
• Recipient of the 1992 Charles Clark Award for Leadership
Introduction
Why So Critical?
• Negative income will put you out of business over time
• Poor cash flow management will put you out of
business immediately
Current Regulatory Environment • NCUA very concerned about:
• Interest rate risk
• Liquidity risk NCUA releases its new Liquidity Contingency Planning regulations in October 2013
Current Rate Environment
• Fed Funds – 0 to 25 basis points (1/4%) • Historically low rates for an extended period of
time • CUs extending out maturities to get more yield • Lending at extremely low rates • Rates can only move in one direction -- UP
What happens when rates rise?
• Market values of fixed assets drop • Investments & loans extend out as pre-
payments slow – particularly RE • Mortgage loans • Mortgage backed securities • Callable securities
What happens when rates rise? • If you need liquidity and need to sell assets –
losses likely to be incurred • Will need to match market rates to maintain
deposits -- if unable to match rates, then deposit runoff may occur (particularly most interest rate sensitive deposits such as CD money)
What happens when rates rise?
• Liquidity tightens as assets are devalued and are slower to pay down
• Liabilities become more expensive to keep
NCUA Regulation §741.12 Liquidity and
Contingency Funding Plans 3-Tiered Liquidity Management Requirements
• Tier 1 (<$50m) : Maintain a basic written policy and list of liquidity sources
• Tier 2 ($50m to under $250m): Expanded policy requirements to include stress tests and annual review
• Tier 3 ($250m and up): All of Tier 2 requirements plus pre-arranged access to a contingent federal liquidity source (defined as being CLF or Fed DW)
• Elevated supervisory expectations for Liquidity
Developing a Liquidity Plan
• Stability of liabilities • Normal asset-related cash flows • Liquidity potential of assets • Outside liquidity resources
Stability of Liabilities • Regular shares • Checking accounts • Money Market accounts • Certificates of Deposit • IRAs
• How rate sensitive is each deposit type?
Liabilities – External Sources of Liquidity • Corporate Credit Unions • Federal Home Loan Bank • Banks • Federal Reserve Bank – Discount Window • Central Liquidity Facility (CLF) • Ability to sell brokered certificates to attract
institutional deposits • Do we have collateral available to utilize
these sources?
Liquidity of Assets
• Normal monthly loan repayments • Principal & interest
• Monthly interest/dividend payments from investments
• Maturity of investments & loans
Liquidity of Assets • Cash
• Overnight Deposits • ATMs • Branch vaults/teller drawers
• Investments • Certificates-of-Deposit • Marketable Securities – which could be sold at
par/ gain/ loss?
Liquidity of Assets
• Loans • Unsecured/Credit Cards • New & Used Autos • HELOCs/1st mortgages • Unfunded LOCs (HELOCs/Credit Cards) • What loans could be sold or participated out
quickly?
Liquidity Contingency Planning • Liquidity events can be local/applicable only to
your credit union: • Plant closing • Industry layoffs • Regional storm damage
• Under these circumstances access to outside liquidity support is typically readily available unless there are creditworthiness issues
Liquidity Contingency Planning • Liquidity events can be more wide-spread or
systemic • Economic downturn/financial crisis
• Under these circumstances access to outside liquidity support is typically limited and/or not readily available • Fed’s Discount Window & CLF provide
government backstop
Liquidity Contingency Planning
• Identify all forms of liquidity that could be generated from your assets
• Identify liquidity risk of all liabilities
• Identify all external sources and order in which they would be accessed
Review • Cash flow/liquidity planning critical element of
managing a balance sheet • When rates rise, asset values generally fall
making them less liquid • Identify all your liquidity resources – assets &
liabilities • Be prepared – develop plan before you need
one
Contact Information David Brehmer
President, Chief Executive Officer First Carolina Corporate Credit Union
Email: [email protected] Phone: 800-585-4317, ext. 3254