Liquidity

Risk is the potential that events, expected or unanticipated, may have an adverse effect on the credit union’s net worth and earnings. The seven categories of risk for credit union supervision purposes are Credit, Interest Rate, Liquidity, Transaction, Compliance, Strategic, and Reputation. Any product or service may expose the credit union to multiple risks; these categories are not mutually exclusive.

CU manages are expected to manage risk – not eliminate risk

Submitted by sevans on Tue, 02/24/2015 - 3:03pm

Risk is fundamental to the operation of a credit union. Examiners, therefore, should not insist that the credit union eliminate risk, but, instead, should ensure that credit unions identify and manage their risks. The desired reward for taking risk is stable profitability and increased net worth. Credit unions must balance risk and reward responsibly. The examiner’s job requires assessing that the appropriate balance exists.

Holding a HQLA portfolio is not the only way to mitigate a bank’s liquidity risk. A bank must show that it has taken concrete steps to improve its LCR before it applies an alternative treatment. For example, a bank could improve the matching of its assets and liabilities, attract stable funding sources, or reduce its longer term assets. Banks should not treat the use of the options simply as an economic choice.

This document presents one of the Basel Committee’s key reforms to develop a more resilient banking sector: the Liquidity Coverage Ratio (LCR). The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario.

Links at NCUA referring to Liquidity and Contingency Funding

Submitted by sevans on Mon, 02/23/2015 - 2:59pm

The link: http://www.ncua.gov/Resources/Documents/SupervisoryLetter-Liquidity-and-ContingencyFundingPlans.pdf

Provides quick links to a number of other sites at NCUA with further information on:

  • Liquidity Review Questionnaire
  • Guidance on how to comply with NCUA Liquidity Regulations
  • Part 741.12 Liquidity and Contingency Plans
  • Interagency Policy on Funding and Liquidity Risk Management 

In addition to a written liquidity policy, a FICU with assets of $50 million or more must have a contingency funding plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls in emergencies. A CFP must include policies, procedures, projection reports, and action plans designed to ensure a credit union’s sources of liquidity are sufficient to fund operating requirements under contingent liquidity events.

Components of a credit union’s Liquidity policy

Submitted by sevans on Mon, 02/23/2015 - 2:55pm

(Credit unions must have a Liquidity Policy …)

This policy does not need to be elaborate, but it must cover certain basic elements that are fundamental to all depository institutions, including all of the following elements:

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