In evaluating the adequacy of a credit union’s liquidity profile, examiners consider the current and prospective sources of liquidity compared to funding needs and the adequacy of liquidity risk management relative to a credit union’s size, complexity, and risk profile. A prudent credit union’s liquidity risk management practices ensure the credit union maintains sufficient liquidity to meet its financial obligations and member share and loan demands. These practices enable the credit union to manage unplanned changes in funding sources, respond to changes in market conditions affecting its ability to quickly liquidate assets with minimal loss, maintain liquidity at a reasonable cost, and limit reliance on funding sources that may be unavailable in times of financial stress or adverse changes in market conditions.
A prudent credit union’s liquidity risk management practices are commensurate with the complexity of the balance sheet and its capital adequacy. This includes evaluating the reporting mechanisms in place to monitor and control risk, management’s response when risk exposure approaches or exceeds the credit union’s risk limits, and the prescribed corrective action taken when necessary.
Liquidity ratings are based on, but not limited to, the following evaluation factors. The order of these factors does not signify a level of importance.
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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
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Availability of assets readily convertible to cash without undue loss
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Access to sources of funding
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Level of diversification of funding sources, both on- and off-balance sheet
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Degree of reliance on short-term, volatile sources of funds to fund longer term assets
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Trend and stability of deposits
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Ability of management to properly identify, measure, monitor, and control the credit union’s liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans
Liquidity Ratings
| Ratings | Description |
| 1 | Indicates strong liquidity levels and well-developed funds management policies and practices. The credit union has reliable access to sufficient funds on favorable terms to meet present and anticipated liquidity needs. |
| 2 | Indicates satisfactory liquidity levels and adequate funds management policies and practices. The credit union has access to sufficient funds on acceptable terms to meet present and anticipated liquidity needs. |
| 3 | Indicates low liquidity levels. The funds management policies and practices are not fully commensurate with the credit union’s size and complexity or the liquidity risks it has taken. The credit union may lack ready access to funds on reasonable terms. |
| 4 | Indicates inadequate liquidity levels. The funds management policies and practices are inadequate given the credit union’s size and complexity or the liquidity risks it has taken. The credit union is likely not able to obtain sufficient funds on reasonable terms to meet liquidity needs. |
| 5 | Indicates liquidity levels are so deficient there is an imminent threat to the credit union’s viability. The credit union requires extraordinary external financial assistance to meet maturing obligations or other liquidity needs. |
Last updated April 29, 2022
