Risk Management

To maintain adequate liquidity, a prudent credit union estimates and plans for changes in liquidity supply—deposit growth—and demand—loan growth—under a variety of conditions and economic scenarios. Both liquidity shortages and surpluses can have adverse effects. Sudden excess liquidity may have a negative impact on net interest margins during an economic crisis, periods of reduced loan demand, or when interest rates are low. A credit union following best practices will consider how access to external funding sources may change under various scenarios, including adverse events such as a CAMELS downgrade resulting from credit losses, which typically develop in a severe economic downturn.

A credit union’s ability to effectively manage the risks posed by liquidity depends on corporate governance and its policies, procedures, and limits.

Last updated April 29, 2022