Published in: Credit Union Business
No matter the movement in rate forecasts and growth expectations, liquidity remains critical for healthy institutions. In order to ensure that adequate liquidity sources are available in the event of the unexpected, institutions should employ tools and resources that provide comprehensive liquidity forecasts and ongoing stress tests in order to evaluate the overall effectiveness of the institution’s liquidity policies.
Liquidity & Liquidity Risk
A simple definition of liquidity is the capacity to meet cash & collateral obligations at a reasonable cost. This includes both expected & unexpected events. Liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet those obligations as they come due.
Within the past twenty years, we’ve had two significant events that demonstrate why sound liquidity forecasting is imperative for institutions of all sizes. During the summer of 2008, Fannie and Freddie were conserved and Lehman Brothers and Merrill Lynch failed. While those broker-dealers didn’t have a deposit base like financial institutions do, their failure shows that a global event can impact a bank or credit union regardless of size. The Federal Home Loan Bank, which many financial institutions rely upon for their borrowings, was impacted. Also, the liquidity crisis also impacted the spreads on all assets and, therefore, the execution of security sales by financial institutions.