A critical component of a credit union’s ability to respond effectively to potential liquidity stress is the availability of a cushion of highly liquid assets. These assets can be converted easily and quickly into cash without legal, regulatory, or operational impediments and can be sold or pledged to obtain funds under a range of stress scenarios. The credit union determines the amount of the cushion of high-quality liquid assets by estimating liquidity needs according to the credit union’s cash flow projections.
Prerequisites
Perform 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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Balance sheet
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Liquidity Policy
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Investment inventory/safekeeping list
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Investment analysis
Questions to Consider
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Given the structure of the balance sheet, the credit union’s business model and size, complexity, and risk profile, are the policy mandated amounts of cash and unencumbered high quality short term liquid assets set at an appropriate level?
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Is the current level of high quality short term liquid assets always maintained above policy risk limits? Are the action steps clear if/when such limits are breeched?
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Does management assess the quality, pricing, and marketability of the loan and securities portfolios to determine available amounts of liquidity?
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Does the credit union incorporate asset sales into its liquidity risk strategy? If so, have stress scenarios been added to reflect an inability to sell loans?
Intersections & Implications
If examiners determine that the prepurchase and ongoing analysis of securities is inadequate, then the examiner reviewing investments (if different) will need to be informed.
Last updated August 30, 2021
