A credit union’s balance sheet composition is the most significant factor in determining the level of quantitative liquidity risk. Balance sheets that exhibit the following risk factors will require management to implement a more robust risk management framework:
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High loan to asset ratio
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Low net worth
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High levels of credit risk
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Dependency on volatile funding sources
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Inadequate amount of short-term liquid assets
Volatile funding sources may be more susceptible to rate changes, reputational risk, or general market fluctuations, making them less reliable as a funding source. Additional risk factors could also contribute to additional liquidity risk. These risk factors may include:
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Non-conforming mortgages
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Sub-prime loans
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Excessive loan concentrations
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Borrowing capacity constraints
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Assets held with significant market value losses
There are internal and external factors that will contribute to liquidity pressures.
Credit union internal factors include:
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Deterioration in asset quality
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Events that affect public reputation or market perception—for example, accounting scandals, adverse consumer or market events
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Deteriorating earnings performance
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Aggressive balance-sheet growth
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Failure of internal systems or controls (fraud)
External factors or events include:
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Geographical—deteriorating local economic conditions
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Systemic—major changes in economic conditions or circumstances in which financial markets, operating under stressful conditions, no longer price assets correctly in an absolute and relative basis
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Market-oriented—certain kinds of assets experience price volatility in response to market events
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Operative—disturbances to payment and settlement systems or local natural disasters
Last updated August 30, 2021
