Getting Your Liquidity Management Program Ready for 2019

Part 1 - ALM Analysis/Strategy

There are several levers to pull: loan sales, borrowings, raising rates on deposit accounts.  How do you decide which lever to pull in an "automated" model? 


In the real world, this choice is generally made based on the cost of acquiring the liquidity.  Use whichever one is cheapest.


In the BSMS ALM Liquidity Model the analyst specifies the order in which contingent liquidity is used, if needed, in a given scenario.


The FRB Discount Window requires originals of the note be held by the borrower securely.  We happen to image and then destroy the originals.  Does FHLB have the same requirement?


Securities pledged to the FHLB as collateral against an advance must be delivered to the FHLB for safekeeping.  For loans pledged as collateral, I believe the FHLB would accept an electronic image of the note. The following hyperlink is to a FHLB Lending and Collateral Q & A document that provides more detail.


I'm seeing a lot of CD promotions in the market. We have been getting emails from members asking us to rate match sometimes double what we are currently offering. Is anyone else seeing this?

It is happening all over the country… and I think the competition for deposits will get worse as the Fed continues to raise rates and shrink their balance sheet.


Can a purchased loan participation (of real estate loans) be used as collateral for FHLB Borrowings?

I don’t believe so. The FHLB will come into the credit union and do a review of the loan documents before accepting the credit union’s mortgage loans a collateral.  In the case of a loan participation, since you do not have possession of the loan files, it is unlikely the FHLB would accept the participation as collateral.


When references the change in the investment portfolio, how much is coming from overnight versus maturing / selling investments?

In the BSMS Liquidity Model, we take cash-flow coming in (including maturing investments) less cash-flow going out (which may or may not include the assumed re-investment of maturing investments) to arrive at a “net cashflow liquidity” dollar amount.  If there is more money going out than coming in, the “negative” liquidity is taken from overnight funds. Once overnight funds hit a “floor” (generally assumed to be 3% of total assets), we then take liquidity from available lines of credit or non-member deposits or assumed loan sales or loan participation sales. The order of accessing this contingent liquidity can be specified by the credit union. 


What is best practice contingent liquidity between the FRB and FHLB?  How much collateral should I leave with the FRB, and what type?

I would say best practice is to have a line of credit with both the FRB and the FHLB. 

The Federal Reserve generally accepts the following as collateral for advances from the discount window:

  • Obligations of the United States Treasury

  • Obligations of U.S. government agencies and government sponsored enterprises

  • Obligations of states or political subdivisions of the U.S.

  • Collateralized mortgage obligations

  • Asset-backed securities

  • Corporate bonds

  • Money market instruments

  • Residential real estate loans

  • Commercial, industrial, or agricultural loans

  • Commercial real estate loans

  • Consumer loans

Whenever possible I always recommend pledging loans as collateral (both at the Fed and FHLB).  This “frees up” securities to be sold if necessary to meet liquidity needs. Click here for more information on FRB advance collateral requirements use this link,

We were told by our State Examiners that we would have to apply for a parity provision for borrowings in order to get to the Fed limit of 50% of deposits and net worth.

Your examiner is correct.  In the State of New Hampshire, the legal borrowing limit for a state chartered CU is only 30% of member shares + undivided earnings.  The examiner is also correct that the CU can apply for “parity” with FCUs to expand that capacity to 50%.  In the case of any State Chartered CU, you must always consult State Laws or Regulations to confirm the permissibility of an activity.  By the way, BSMS’ Regulatory Affairs department over the years has compiled a “master list” of permissible activities for each state. If you have a question and don’t know the answer or can’t find the answer, call us. We can help do the research.


Since rates are on an Up momentum, should we emphasize Rates Up when running liquidity stress scenarios?

Yes. In the BSMS Liquidity Model, in the “stressed scenarios” we default to assuming a +300 basis point rate-shock scenario.

Loan participation sales to me are long term for where you have cash short falls- a short term issue (ie-12 months) vs a 10- to 20-year payout each month.  I must be missing something.

With regards to Loan Participations (LP), the fact is that selling LPs really is nothing more than a form of secured borrowing, in effect the loans sold are essentially pledged as collateral against the amount borrowed.  From an accounting standpoint that is not how it is booked, but functionally it is the same thing.  The CU receives principal and interest every month on the loans in the pool, and then passes through the pro-rata share of principal + the agreed upon interest to the buyer of the participation.  The benefit here of using LPs versus other forms of borrowing is simply that the CU never has to pay back the loan…. your member pays it back for you.


CLF (does it not) require a deposit non-int.

The CLF (just like a corporate CU and the FHLB) requires the CU to buy capital stock of the Central Liquidity Facility.  Capital stock of the CLF has historically paid a dividend quarterly.  Generally that dividend has been at or just below the federal funds rate.  The following is a link to an FAQ document on NCUAs web-site:


Getting Your Liquidity Management Program Ready for 2019

Part 2 - Regulatory Focus on Liquidity

Are brokered CDs considered core or Non-core funding?

Brokered CDs (and for that matter all time-deposits) are all considered “non-core” funding.


What term (maturity) is considered short-term investments/liquidity?

For purposes of NCUA’s Cash + Cash Equivalent + Short-term Investments as a % of Total Assets Liquidity Ratio, “Short-term Investments” are defined as those investments reported on the Call Report as “less than one year”.


In a liquidity policy, should there be a specific section that states what the CU would do in each of the funding events you listed? A temporary, moderate and severe?

In the Liquidity Contingency Funding Plan there should be some “triggers” in the policy that specify what would cause the funding event and then state action steps to be taken by the ALCO or management team.  For example (and these are just examples), if there is a significant adverse change in loan delinquency for two consecutive quarters, the ALCO must determine whether this is a trend or an unusual non-recurring event, and then the Loan Department may begin tracking daily any internal credit deterioration and keep the members of the ALCO updated of meaningful changes and/or modify credit policy to ensure that new loans are liquid, if possible.  


Can you give an example of a non-member deposit?

NCUA rules and Regulations Part 703.32 authorizes any Federal Credit Union to accept deposits from municipalities (“public units and political subdivisions thereof”) and other credit unions.  Low-income designated Federal Credit Unions can accept deposits from anyone. State Chartered CUs must consult their state laws and regulation to determine if this is a permissible activity for them.


Is one board member required by NCUA to be on an ALCO?

No it is not required by NCUA.  However, NCUA Rules and Regulations Part 741 states “The board of directors is responsible for oversight of their credit union and for approving policy, major strategies, and prudent limits regarding IRR. To meet this responsibility, understanding the level and nature of IRR taken by the credit union is essential. Accordingly, the board should ensure management executes an effective IRR program.”  Given this expectation it is highly advisable that at least one board member sit on the ALCO.  Additionally, here is what the new NCUA’s Examiners Guide says on the topic:

“A credit union’s board of directors may appoint an Asset/Liability Committee (or similar committee) to monitor the credit union’s liquidity profile. This committee is comprised of credit union staff from all major functional areas that can directly or indirectly influence the credit union’s liquidity risk profile, and may include a member from the board of directors. Committee members should include senior managers with authority over the units responsible for executing liquidity-related transactions and other activities within the liquidity risk management process.”


Total Borrowing should not exceed 50% of shares and net worth. Does this % include non-member deposits or not? Please explain through example. Total deposit 150 MM and net worth 50 MM.  In this case what should be maximum amount CU can borrow?

No – a non-member deposit is not considered a “borrowing” under 12 CFR 107(7)(9).  For Federal Credit Unions, the legal borrowing limit is technically “no more than 50% of unimpaired capital and surplus” (level may vary for some state credit unions depending on state).   The definition of “unimpaired capital and surplus” is member shares + undivided earnings (not all of net worth, just undivided earnings).

So a typical $150 Million in Assets CU has $125 Million in Member Shares (does not include non-member deposits). They have $16.5 Million in Net Worth, of which $11.7 Million is Undivided Earnings.

$125.6 Million (member shares) + $11.7 Million (Undivided earnings) times 50% = Legal Borrowing Limit of $66.6 Million.


Was the negative shares for the 2,000 credit unions thru June 2018, or a comparison of balances for
March 2018 vs. June 2018?

The chart on slide 25 of the part 2 webinar showed loan and share growth for the second quarter of 2018.  The chart on slide 24 compared the number of credit unions experiencing negative share growth in year ending 2016 and 2017.


Are you able to provide any information/guidance on transferring investments from HTM to AFS.

If the CU currently has securities classified as HTM, they can re-classify them to AFS at any time, with one condition. 

The "penalty" associated with this accounting change, is that ALL securities must be reclassified from HTM to AFS all at the same time.  In addition, all future purchases must also be classified as AFS until such time as the CU's CPA "Okays" an HTM classification. (Note: ASC320 does not specify when that may happen, however the AICPA accountants trade group "recommends" a 3-year period before future HTM is solely the discretion of the CU’s CPA as to when an HTM classification can be made after the transfer).

Note:  With regards to the reclassification of a security from HTM to AFS, at the point of making the reclassification/transfer, the unrealized gain or loss IS NOT reported on the income statement!  The reclassification is simply adjusting the asset side of the balance sheet/investments to their market value, and the unrealized gain/loss is recorded directly to capital (so your balance sheet still balances...).  The only time a gain or loss touches the income statement is if and when a bond is sold, if a security is classified as a "Trading" security (not HTM or AFS) or if an issuer defaults on the bond and it is unlikely you will ever get your money. 


Does BSMS perform the liquidity stress test as you described?

Yes we do.  It is part of our comprehensive ALM Analysis bundled with Regulatory Support.  Expanded upon within the Contingency Funding Plan (slide 49) for various degrees of Funding Crisis Events and BSMS calculates with every ALM run, though required annually.

Back to Top

Balance Sheet Management Services (BSMS) is an affiliate of First Empire Securities. First Empire Securities is a member of FINRA and SIPC. Balance Sheet Management Services is not a member of FINRA or SIPC.


Important Disclosures  |  Privacy Policies  |  Business Continuity Plan | Risk Disclosures  |  Volcker Rule Conflicts Disclosure

This site is published in the United States for U.S. residents only. The services offered within this site are available exclusively through our U.S. Financial Advisors. Stifel Financial Advisors may only conduct business with residents of the states in which they are properly registered. The information on this web site is not an offer to sell or a solicitation of an offer to buy any security, nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale may not lawfully be made. References to Stifel herein may apply to parent company Stifel Financial Corp. or any of its wholly owned subsidiaries, including Stifel, Nicolaus & Company, Incorporated, Member NYSE, FINRA, and SIPC.

© 2019 Stifel Financial Corp.  All Rights Reserved.