CFO Focus: Three Ways Credit Unions Can Prepare for Liquidity Challenges

Sponsored by Origence

Financial institutions across the nation are bearing the brunt of an unstable economy—and liquidity challenges have taken center stage in the minds of industry leaders. With high interest rates and fear of a looming credit crunch growing, institutions must find ways to unlock liquidity and support sustainable growth.

In today’s environment, no financial institution is immune to liquidity challenges. However, credit unions and regional banks face more obstacles than the big banks, as larger banks typically operate under more stringent risk management guidelines that account for periods of restricted liquidity. Larger financial institutions also tend to have access to more diverse funding sources.

Yet despite the inherent challenges they face, credit unions can achieve liquidity resilience by prioritizing process efficiency and leveraging their member-centric approach. With these priorities and the right asset/liability management strategy in place, credit unions can navigate liquidity challenges while continuing to provide consumer-friendly services and rates to their members.

How to Navigate Liquidity Challenges

During periods of restricted liquidity, some credit union leaders may assume the best option is to restrict lending. However, it’s important to recognize that reestablishing a strong lending presence can pose an even greater challenge than navigating liquidity hurdles.

Instead, consider the following strategies to ensure your institution is well-positioned to weather liquidity challenges:

1. Revisit your ALM strategy. There’s no better time than now to create an ALM strategy or revamp your existing one. More specifically, pinpoint potential funding sources as part of your risk planning, which is important even if your loan-to-share value is already low. Many existing contingency funding plans have funding sources listed in order of priority or preference. In the current environment of bank runs, priority may need to be adjusted to reflect the speed at which funding may be available from the funding sources. As a credit union, much of your funding likely comes from members, so consider how to diversify funding within this group. Does your credit union have the tools to provide highly personalized products and services to retain and grow membership? It’s also wise to consider incorporating strategies like securitization, through which assets are pooled and repackaged into interest-bearing securities, into your ALM playbook. While securitization was previously available only to large banks, it has become a viable way for credit unions to gain access to liquidity and manage credit risk. However, establishing policies and procedures for securitization requires significant time and resources. It isn’t an immediate fix, but securitization can help make your institution more resilient to future market changes. 
2. Play to your strengths. Capitalize on your position as a consumer-first institution by prioritizing your relationships with members. Strengthening member relationships during periods of restricted liquidity allows you to communicate more effectively with members regarding the institution’s financial stability, as well as the benefits of maintaining deposits and doing additional borrowing. While building a foundational relationship with members is crucial, you can also take your member experience to the next level by providing more personalized lending services. Personalization and relevance are key to increasing member engagement. Whether offering better rates, more flexible terms, customized products and services, or providing financial education resources, you can meet members’ evolving expectations—and ensure a stable funding source. Additionally, it’s important to meet your members where they are in terms of their digital expectations.
3. Streamline the lending process. Maintaining efficient and accurate lending operations can increase loan approvals and minimize risk for your institution. With the right modern loan origination system, you can sunset manual, time-consuming tasks and consolidate (and automate) steps in the lending process. These improvements reduce the time between loan approval and the inflow of funds, which supports healthy cash flow. 

Further, institutions are understandably more risk-averse in response to ongoing bank turbulence. With an LOS that enables AI integrations, you can connect with cutting-edge lending tools that offer comprehensive credit risk assessments. A clearer picture of borrowers’ financial health and habits allows you to price loans more accurately, reducing the likelihood of defaults and delinquencies. 

Don’t Wait to Plan for Liquidity Challenges

Your institution’s ability to manage liquidity shocks and disruptions is critical to your bottom line at a time when the lending environment remains uncertain. By developing robust liquidity management practices now, you can set up your credit union for long-term financial stability and position yourself to weather even the toughest lending economies.

Neetu Bhagat is CFO of Origence, a CUES Supplier member.