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Credit unions participating in NAFCU's webcast yesterday learned it only takes one event to throw an otherwise balanced funding and liquidity risk management program off-balance, so contingency planning is critical.

During the webcast, Janice Hollar, senior vice president ofRP® Financial LC, provided an overview of interagency guidance that was released in March regarding funding and liquidity risk management.

Hollar began by noting that the guidance, which is detailed in NCUA Letter to Credit Unions 10-CU-14, does not replace the agency's examination guide but isdesigned only to highlight the agency's expectations regarding liquidity management. She said credit unions should begin by evaluating their liquidity positions and then using the five strategies outlined in the letter.

They include:

• projecting cash flows;
• diversifying funding sources;
• stress testing;
• having a cushion for liquid assets; and
• developing a formal contingency plan.

Regarding cash flow projections, Hollar said credit unions should forecast their cash needs on daily, weekly, monthly and quarterly bases. Assumptions are critical to projections, she added. NCUA Letter to Credit Unions 00-CU-13 includes a basic liquidity template and instructions to help credit unions forecast cash flows.

When looking at diversifying funding sources, Hollar suggested that credit unions have a plan in place for borrowing funds. For instance, she noted that the application for a Federal Home Loan Bank loan is huge and takes time to complete.

When stress testing, she said credit unions should consider events that could affect both their institutions and the entire marketplace. One of the best sources for a credit union's contingency funding plan isstress testing, she said. Credit unions should test for events such as unexpected draws on member lines of credit or mass withdrawals of funds.

She also highlighted the importance of documenting efforts to manage liquidity risk in order to show NCUA examiners that there is a serious program in place.

Yesterday's webcast will be archived for six months.