Is a Liquidity Crisis Down the Road?

By Ray Birch06.29.2020

While many credit unions are likely focused on a potential default crisis, what they may be missing is the potential for a liquidity crisis down the road, suggests one corporate credit union CEO.

Credit unions are currently flush with liquidity resulting from deposits of stimulus money, a flight to safety with deposits, and sharply reduced loan volumes, and that perfect storm could lead many CU leaders to look away from the potential for certain scenarios should an economic recovery take longer than expected to occur.

Jay Murray, CEO of Vizio Financial, said that under such a scenario a significant number of members who are relying on their savings to make ends meet could eventually withdraw much of their deposits.  

“There's been a lot of talk about concerns over defaults,” stated Murray. “But there hasn't been much talk about people taking their money out of the credit union quickly.”

It’s not a short-term threat, Murray agrees, but it is one that could begin to develop later in 2020 as the negative economic effects from the pandemic force consumers to dip deeply into reserves.

As CUToday.info reported, the U.S. Labor Department recently stated the jobless rate has improved, in a surprise to many economists, but it was still 19.2% in April and likely 16.1% in May. Many economic analysts say the official unemployment rate undermeasures how many people are actually out of work.

“Give consumers a few months, especially if a consumer’s company or industry does not recover as fast as the rest of the country,” said Murray. “I believe we will begin to see a drain on liquidity at credit unions. Things could start to go the other way.”

Broad Effects

Murray noted the pandemic is affecting a broad swath of industries, including real estate and all of the industries related to one of the biggest drivers of the U.S. economy. He pointed out, for instance, many would-be home-sellers are choosing not to list their homes due to concerns over the coronavirus.

“What if you are a hotel worker, work at a restaurant, or are part of entertainment industry? So some members are going to be affected more than others. And, we have to look even outside the for-profit world,” said Murray. “Non-profit organizations may suffer as companies find they don’t have the money this year to provide the kind of support they have in the past. There could be layoffs among non-profits.”

Murray acknowledged a great deal is unknown regarding the future of the economy and consumers’ balance sheets.

“And we are not certain about further stimulus,” he said. “But I think it is wise credit unions be prepared for whatever situation arises.”

Murray said he believes some credit unions are already preparing.

“We know there are CUs looking at this possibility,” said Murray. “Our corporate provides brokered investments, brokered CDs, and other things. But there are some credit unions that have said, ‘I'm holding this money in cash right now, because I don't know what my member behavior may be.’ Because no one knows what's going to happen. If the country opens up and goes back to normal, great. But if not, I don't want to be tied up because I don't know what my members are going through and what they are going to do.”

Running ALM Models

Murray said Vizio, in addition to investment opportunities, is helping many credit unions now with asset-liability modeling under the various scenarios.

“We’re helping them project and predict what they're going to have available,” noted Murray. “Credit unions need to look at their liquidity plans and know what sources they have in place to tap. Right now people are saving money, many just got a boost in unemployment, getting an extra $600 a week. But the long play is that we may not come out of this with everything rebounding quickly. So, there are going to be a lot of people who start to go through their savings.”

Reprinted with permission from CUToday.info, a leading source of news and resources for credit union decision-makers.