Even if a credit union’s current liquidity position is sound, it can be threatened by both planned changes in the credit union’s business plan and unexpected events. For example:
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New programs and services—If a credit union intends to offer a new program or service, it plans for the impact on cash flows and liquidity. A new program can increase liquidity by bringing in new member shares or fee income, but any added expenses associated with the program could increase cash outflows. It is prudent for a credit union to thoroughly evaluate cash inflows and outflows and the anticipated impact on liquidity before offering any new program or service. Conversely, if a credit union ends a program or ceases offering a service, it is judicious to consider the impact on cash flows and liquidity.
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Changes to the FOM—Credit unions with a closed FOM may experience a liquidity crisis if the sponsor organization makes changes—for example, layoffs or closure.
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Natural disasters/emergency events—Natural disasters and emergencies can impact a credit union’s liquidity, particularly if members need to withdraw funds quickly for emergency needs and repairs. This type of event can also affect the credit union’s ability to continue normal business operations.
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External economic conditions—Shocks to the economy, such as a recession, can have a broad impact. Stress testing and forecasting liquidity levels can help a credit union prepare for various scenarios.
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Reputation issues—Events that call into question the safety and soundness of the credit union—for example, internal or external fraud or theft—can cause members to withdraw their funds, leading to a liquidity crisis.
Prerequisites
Conduct an initial assessment of liquidity before completing this exam step.
People to Interview
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President/Manager
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Chief Financial Officer
Documents to Review
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Business plan/strategic plan
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Budget/financial projections that coincide with the business/strategic plan
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Board of Directors meeting minutes
Questions to Consider
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Are there any planned changes to products and services that may cause a liquidity shortfall?
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Are there any indications of potential reputational issues discussed in the board minutes that may cause members to withdraw their funds?
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Are there any significant fluctuations in the budget that has the potential to create a liquidity event?
Intersections & Implications
Bring any reputational issues discovered during the liquidity review to the EIC’s attention, as these issues may affect multiple review areas.
Last updated August 30, 2021
