Many of you probably saw the NCUA Express notice which was sent to credit unions last week announcing an upcoming webinar on liquidity.  As you know, a credit union’s liquidity risk is a supervisory priority for NCUA because of the increased potential that liquidity stressors have on a credit union’s earnings and capital.  Earlier this year, NCUA issued an advisory providing key areas of liquidity management and reminded credit unions that it is the responsibility of a credit union’s management to effectively identify, measure, monitor, and control a credit union’s exposure to liquidity risk in a timely and comprehensive manner.  Consistent monitoring is even more important during times of increased economic uncertainty.

Liquidity risk management is assessed in the “L” component of a credit union’s CAMELS rating.  Credit unions are assessed on their practices to ensure that the credit union maintains enough liquidity to meet the credit union’s financial obligations and the loan and share demands of members.  Risk management practices put in place by individual credit unions are specific to their size and the complexity of its balance sheet and capital adequacy.  Effective risk management requires constant and consistent evaluation of these reporting mechanisms to monitor and control risk; evaluating the management’s response when risk exposure approaches or exceeds the limits put in place by the credit union; and, if necessary taking prescribed corrective actions.

The following factors are considered when examining a credit union’s liquidity risk management for a rating under the “L” component (as detailed in the NCUA Examiner Guide):

  • Adequacy of liquidity sources compared to present and future needs and the ability of the credit union to meet liquidity needs without adversely affecting its operations or condition
  • Availability of assets readily convertible to cash without undue loss
  • Access to sources of funding
  • Level of diversification of funding sources, both on- and off-balance sheet
  • Degree of reliance on short-term, volatile sources of funds to fund longer term assets
  • Trend and stability of deposits
  • Ability of management to properly identify, measure, monitor, and control the credit unions liquidity position, including the effectiveness of funds management strategies liquidity policies, management information systems, and contingency funding plans.

Effective liquidity risk management practices ensure the credit union maintains sufficient liquidity to meet the credit union’s financial obligations and loan and share demands.  These practices enable the credit union to manage unplanned changes in funding sources, and therefore allow the credit union to respond quickly to adverse market conditions or in times of financial stress.

It is the responsibility of a credit union’s management to develop policies and procedures for managing the credit union’s liquidity needs.   From a regulatory compliance standpoint, NCUA regulation § 741.12 requires all federally insured credit unions to establish a written, board-approved liquidity policy.  The policy should be reviewed annually (and reassessed whenever the credit union experiences changes that require a review).  Senior management should be updating the credit union’s board of directors frequently on the status of the credit union’s liquidity needs and risk profile.

A credit union’s liquidity policy details how the credit union will manage the following:

  • Daily operating cash needs
  • How the credit union meets forecasted liquidity shortfalls
  • How the credit union will respond to unforeseen liquidity events

The liquidity policy can either be a stand-alone policy or it can be part of other related policies such as an asset liability management (ALM) policy.

For credit unions with assets above $50 million, in addition to a liquidity policy, they are required to have a corresponding contingency funding plan (CFP) that specifies the strategies the credit union will use for addressing liquidity shortfalls in adverse situations.  The CFP should address the following:

  • Identify a range of stress environments
  • Establish clear lines of responsibility and communication
  • Establish liquidity management processes
  • Forecast and assess the adequacy of liquidity sources
  • Identify specific contingency sources
  • Specify frequency of testing and updates

In addition to a liquidity policy and a CFP, federally insured credit unions with $250 million or more in assets must have access to alternate sources of federal emergency liquidity for use in times of financial emergency.  Credit unions can meet this requirement by maintaining membership in the NCUA’s CLF and/or establishing a relationship at the Federal Reserve Discount Window.

As already noted, NCUA continues to highlight the need for credit unions to have a strong liquidity management framework. On April 4th NCUA is holding a webinar to discuss liquidity risk management approaches and expectations.   In case you missed the announcement, a registration link is below as well as additional resources related to the requirements for a credit union’s liquidity risk management framework and policies.

NCUA Resources:

NCUA Webinar: Liquidity Risk Management

2010 Interagency Policy Statement on Funding and Liquidity Risk Management (liquidity framework)

Letter to Credit Unions 13-CU-10, Guidance on How to Comply with NCUA Regulation §741.12 Liquidity and Contingency Funding Plans,

Letter to Credit Unions 23-CU-06, Importance of Contingency Funding Plans

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