Excess Liquidity: What To Do?
By Scott Powell, CFA®
Many credit unions are faced with the challenge of carrying too much cash while dealing with the combined headwinds of lower credit demand and ultra low, shorter maturity yields for governments, agencies, and other eligible spread instruments.
In the meantime, member demand for the best possible rates remains ever present.
It appears the global economy and capital markets face continued challenges that will keep economic growth at bay and interest rates lower than expected.
While we’re all aware market conditions can and will change, credit union management should prepare for an extended deposit-rich, low-rate, low-credit-demand environment for the next 12 to 24 months.
1. Reduce deposit assets
For credit unions that have an investment program, members may be encouraged to visit the investment representative to look at alternatives to core credit union deposits, such as fixed or single-premium immediate annuities, money market mutual funds, short duration funds, or other alternatives.
While deposits are reduced, the credit union still retains some control over them because members aren’t taking their deposits to another financial institution, eager to expand their relationship.
For credit unions without an investment program, a possibility may be to partner with a local investment representative to accomplish the same objective.
A secondary benefit from a reduction in deposits is that your National Credit Union Share Insurance Fund assessment may be lower.
2. Work with institutional fixed-income managers
Find someone who understands your business and objectives to access scalable investment talent and platforms that also provide narrow institutional pricing and proven value-added results. In this tight-spread environment, every basis point earned and/or saved counts.
As part of your investment portfolio, consider leveraging other financial institution balance sheets through insured certificate of deposit (CD) purchases either through direct purchase or a brokerage account. Some institutions are offering CD rates that are a function of higher lending demand as opposed to being priced of the Treasury yield curve.
3. Monitor deposit rates
Closely monitor competitive deposit rates and consider keeping your credited rates at the lowest end of your competitive and philosophical range—a hard balancing act, we know.
4. Boost lending
Continue to develop highly targeted, value-added lending programs to higher-quality credits within your member profile to build the asset side of your balance sheet in a prudent manner.
While these strategies may not offer anything particularly new, if managed collectively and consistently over a defined time period, we think you’ll be pleasantly surprised at the constructive results your organization can generate.