NAFCU Services Blog

Jan 27, 2023

Can we help each other with Liquidity?

By Will Sneed, SVP of Lender Partnerships at LendKey

Over the last 18 months, credit unions have experienced excess liquidity of historic proportions as stimulus monies were pumped into the financial system during the pandemic and consumers prioritized saving and reduced spending. In response to this phenomenon, many credit unions aggressively tapped into alternative lending channels to deploy capital, which in turn created a healthy flow of loan participation opportunities for credit union sellers and buyers.

Now the script has flipped. Although lending has persisted, interest rates have risen, consumer behavior has changed, and the surplus of deposits have run-off for many. As a result, the loan participation activity has seen a drastic decline, creating a stalemate in the market.

Uncertainty abounds for many depository institutions; however, credit unions have an advantage during times like these. It’s a shared purpose and mission that allows credit unions to unite for the benefit of all.

Credit unions are in a holding pattern

A credit union’s top priority is to serve its members, and many would argue maintaining a strong balance sheet and financial position does just that. For some though, there is a hesitancy to make moves that don’t directly serve members. This is understandable, but what if the greatest risk is doing nothing?

The threat of a potential recession is looming if not imminent, which leads to the fear of layoffs, continued inflation, and greater pressure on members. This chain reaction could leave portfolios vulnerable if sound liquidity management strategies aren’t implemented.

If our economy does go into a recession, there’s going to be a downward drag on deposit growth – causing more liquidity issues. If credit unions want to continue to best serve their members, they need to create room on their balance sheets to replenish their portfolios with current market rates, attain diversification, and avoid concentration risk.

Credit unions on the fringes can be the heroes

Not all credit unions have equitable access to loan participation purchase opportunities; established relationships can make it hard to find available deals, some institutions don’t have a loan participation policy or aren’t familiar with this lending strategy, and there are others that possess an insatiable appetite for loans but can’t break through. In short, there are credit unions with liquidity on the sidelines that could benefit from loan participations.

There are credit unions that need to sell and buyers that can take advantage of an opportunity that hasn’t always presented itself. The answer could be for credit unions on the fringes who have liquidity to step in and be the spark to ignite movement by purchasing loans from larger credit unions who need to sell portions of their portfolios to stay active and serve their members.

“The market is showing lots of volatility, but for those credit unions who may not have traditionally been in the participation market, it is a great time to let their liquidity work for them,” says Amy Henderson, Chief Consumer Officer of Greenstate Credit Union. “This is not only the time to help out their peers who need to sell, but also have a positive impact on their own ROA. It is an opportunity for the credit union industry to work together as we continue to navigate these unusual times.”

There’s no question that liquidity is a challenge for many credit unions. However, with strategic pricing and long-term alternative funding strategies, credit unions will serve more members and successfully manage their balance sheets. Join Amy Henderson, Chief Consumer Services Officer at Greenstate CU, Devin Hughes, VP of Business Development at LendKey, and Michael Adams, VP of Lender Development at Open Lending for a panel discussion to learn how credit unions can strategically serve more members, effectively price for loans, and successfully manage their balance sheet.

Ready to learn more about how credit unions can stay ahead of the curve? Listen to the full conversation in this upcoming NAFCU webinar.