The Balancing Act of Safe Liquidity Levels and Satisfying Earnings

Posted by Katy Wagnon on April 4, 2023

Credit unions often feel squeezed between two conflicting goals. On the one hand, maintaining safe levels of liquidity is important for any financial institution. Safety leads to longevity and prudence, hallmarks of a credit union that plans to be around for some time. On the other hand, growth should also be sought and prioritized. This can be done strategically if safety is not forgotten along the way, and GoWest Solutions partner, Catalyst, has identified a couple of areas to focus on.

Liquidity is Safety
It’s crucial that financial institutions keep adequate amounts of liquidity on hand as a safety measure, but the challenge is identifying how much liquidity is necessary. Quality balance sheet management requires constantly testing your current balance sheet’s cash flows with various stress scenarios to manage risk levels over time. Stress testing evaluates balance sheet health, but it does not create it.

Creating a healthy balance sheet requires both long-term and short-term plans that are executed well to ensure liquidity is maintained over time. One primary strategy of balance sheet management is appropriate loan and deposit pricing.

Loan and Deposit Pricing
Identifying and implementing market pricing for both loans and deposits will naturally result in more balanced liquidity levels. If this balance is not accurately achieved, credit unions risk either excessive loan demand without sufficient deposit growth to support it or deposit runoff as members seek better rates elsewhere. Both scenarios lead to liquidity pressures that can be mitigated through appropriate loan and deposit pricing.

Significant loan growth is often very attractive, but the reason behind loan growth is important from a balance sheet perspective. Better advertising and growing membership are both natural causes for loan growth. However, financial institutions sometimes fall into the trap of pricing loans below market rates to stimulate additional loan growth. As enticing as this may be, it can increase liquidity, interest rate, and credit risks.

On the flip side, deposit rates priced too low can be detrimental to credit unions. Account holders may begin looking elsewhere for more competitive rates. This is the balancing act – credit unions need to resist the urge to stimulate growth by pricing loans and deposits too low.

Balance is possible through advisory services. Learn more about GoWest Solution partner, Catalyst Strategic Solutions Advisory Service, an SEC-registered investment advisor that provides customized balance sheet solutions for credit unions. Catalyst’s team creates tactical plans to address long-term liquidity, earnings, and risk management. Contact your GoWest Solutions team to get started.

Posted in GoWest Solutions, Top Headlines.