While the backend of 2022 has brought us post-covid, a new onset of struggles, by way of inflation and a (presumable) recession, have emerged. The economy is seeing some of its greatest challenges globally since 2008, such as a looming liquidity crisis, leaving financial institutions to strategize how to meet revenue generation and portfolio growth moving forward.
This liquidity crisis, or lack of cash or easily-convert-to-cash assets on hand, could imminently render financial institutions unable to continue meeting customer demands for share withdrawals and new loans. While there are hurdles to overcome to improve stability, remaining vigilant can help banks and credit unions protect and better manage their balance sheet liquidity during these times – such as diversifying your lending portfolio with innovative loan products.
If facing a liquidity crisis, consider asking yourself a few questions to help guide your institution’s strategic actions and reactions.
What’s my interest rate comfort level? It seems interest rates went from 0 to 60 in about two seconds (or maybe more like 3% to 7.5% over the last year). But how you react to these increases can determine your ability to adapt to the changes. Whether you are being proactive with making rate changes or waiting out the competition before making changes to your balance sheet, staying mindful of your options and analyzing internal data will help you make the best decision for your institution. If you have a higher loan-to-share ratio, you might be operating steadily and looking forward to what 2023 brings with organic lending. But, if you have a lower loan-to-share ratio, knowing where and how to quickly access that additional deposit money is key.
Can we reduce risk? Of course, but remember - there is risk in doing something and in doing nothing at all. Take a look at your portfolio. Are you pricing for today to mitigate risk? Coming off the lowest rates in decades, loans and refinancing were exploding. Now, with less business (due to higher rates), pricing is incredibly important. What can you move off your portfolio? Consider incentivizing your customers to modify/move to new, shorter-term loans to pay them off sooner, along with always being aware of your internal run rate.
You can also avoid making future mistakes by evaluating your past. Tap into your institution’s internal data and analytics to see how your institution has historically adapted to similar changes previously. Stress tests and predictive analytics can also help gauge future actions.
What trends are we seeing? According to the NCUA’s Quarterly Credit Union Summary for Q2 2022 (PDF download), cash on hand declined by $74 billion, while loans increased and deposits went down. As loans outpace new deposits, institutions could be forced into depleting deposit money that they had previously been building up, thanks to the previously strong economy. Predictively, today we are seeing more sellers than buyers. With that, sellers are selling under par and adding on higher-yielding assets in order to move items off.
What can I do right now? Fortunately, there are more tools available to us now than in 2008. Credit bureaus can help you analyze your customer in order to make informed decisions. From how quickly they pay off debt to how quickly they bring it on – you can proactively lower their credit limit, limit their home equity loan, and more to help reduce your risks.
Additional action items include:
- Finding a predictive analytics product to create a “roadmap” can help take the guesswork out of creating a strategy.
- Review your loan policy/program and make necessary changes.
- Invest in default/POS insurance to protect both your customer institution.
Learn more about stabilizing your balance sheet by watching the webinar: Stability in the Liquidity Crisis: Stabilize Your Credit Union’s Balance Sheet
This ongoing roller coaster ride to stabilize balance sheets more than likely won’t stop anytime soon. While diversifying with opportunities such as whole and participation loans can help, banks and credit unions should be constantly evaluating their portfolio, and continually entering and exiting products that generate stability and promote growth.
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