Is The Credit Union Liquidity Crunch Finally Here?

The industry is facing a challenge as it looks for ways to fund record loan demand.

QUARTERLY CHANGE IN UNREALIZED GAINS AND LOSSES VS. BORROWINGS
FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.22
© Callahan & Associates | CreditUnions.com

  • Loan balances were up 19.4% year-over-year as of Sept. 30, 2022, leaving credit unions in need of a source of funding to meet this record demand. Credit unions have been using cash investments as their primary funding source, repurposing much of the liquidity accumulated throughout the pandemic. Cash balances across the industry were down 42.0% since the third quarter of 2021 and 16.9% since midyear 2022.
  • Cash balances comprised just 7.1% of industry assets as of Sept.30, down from 13.4% from one year ago and back in line with historical averages. Credit unions are now left with a few options to fund loans: attract new member deposits, borrow funds from the Federal Home Loan Bank or other sources, or sell termed investment products.
  • Although some credit unions have attracted deposits through promotions — share certificates were up 7.9% since June 30 — members can only save so much when many are struggling to pay monthly bills.
  • Portfolio managers are hesitant to sell termed investment products, such as treasury bonds or agency securities, because they would realize substantial losses. As interest rates have skyrocketed, bond investments have suffered, and total industry unrealized losses stood at $39.6 billion as of Sept.30, the most on record. If a credit union holds a bond to maturity — rather than selling to raise liquidity — unrealized losses go away.
  • So, credit unions are turning to borrowing channels to boost liquidity. Industry borrowing balances were up 90.9% year-over-year as of Sept. 30. Borrowing is a costly source but remains a valid option to fund member lending.
December 19, 2022

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