In the wake of the recent bank-run crisis, credit union executives and financial advisors are diversifying their investment portfolios and using federal funding to counter liquidity risk.
Lead regulators with the National Credit Union Administration underscored their concerns surrounding
"We've gone through, in such a short period of time, an incredible change in liquidity from when the government took unique steps during the COVID-19 pandemic to inject a huge amount of cash into the system … to the unprecedented rise in interest rates by the Federal Reserve [now] creating a bit of a liquidity crisis," Anthony Cappetta, president of the Central Liquidity Facility, said during the NCUA's capital markets symposium at the New York Stock Exchange on April 11.
Congress established the CLF in 1979 as a federal source of funding for federal and state-chartered credit unions that were then excluded from accessing parallel sources of capital such as the Federal Reserve discount window. Managed by the NCUA board, the corporation assists those institutions that direly need loans to maintain operations and support expansion efforts.
Alloya Corporate Federal Credit Union in Naperville, Illinois, which helps consumer or "natural person" credit unions transfer funds among one another as the settlement component, encourages members to continually monitor their liquidity positions and ensure adequate access to all available sources of funding, said Tim Bruculere, senior vice president of Alloya Corporate.
"Credit unions, at this point in time, have more financial tools than ever before. … Engage in brokered certificates of deposit, make sure your primary line of operating credit is right sized, make sure you establish with the Federal Home Loan Bank system and most importantly [as credit unions] sign up for the Central Liquidity Facility," Bruculere said.
Recognizing the demand for more funding options among credit unions and other depository institutions, the Federal Reserve debuted its
Patrick Dwyer, vice president of the Federal Reserve Bank of New York, explained how the initiative succeeded by limiting acceptable collateral to treasuries and agency securities — which include mortgage backed securities — and still lending up to the par value of the assets.
"That risk of losses on those types of assets in the rising interest rate environment is part of the reason why we set up this facility to make funding available at the full value of the securities — regardless of what's happened to their market value," Dwyer said.
Many credit union leaders are taking a
"Credit unions out there are holding their real estate on their balance sheets, whether it's their headquarters or operations center, but they're holding them at depreciated value. … But with the market value of those assets standing at two to three times those values," credit unions could access that capital by selling those buildings and leasing them back, Spuck said.
For institutions with smaller economies of scale, the conversation about liquidity can start by looking at investment portfolios and setting a benchmark for how much excess is needed for supplementing the balance sheet, said Wade Barnett, managing director and head of credit union financial services at the New York-based investment banking and capital markets firm Jefferies.
"Bifurcate your portfolio [into a strategic liquidity portfolio and a total return portfolio] then stick to the discipline. … It can apply to a credit union with $50 million of assets or $50 billion," Barnett said.
