#78 Short Take on Liquidity Risk - Why it Is NCUA's #2 Concern

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Liquidity Risk

Higher interest rates have caused a slowdown in prepayments for some loans and investment holdings, which has resulted in reduced cashflows. Large increases in share balances from 20202022 may result in an increased level of share sensitivity and share roll off as market rates continue to rise.

In evaluating the “L” component of the CAMELS rating to determine the adequacy of your credit union’s liquidity risk management framework, examiners will consider the current and prospective sources of liquidity compared to funding needs. Examiners will review your credit union’s liquidity policies, procedures, and risk limits. Examiners will also evaluate the adequacy of your credit union’s liquidity risk management framework relative to the size, complexity, and risk profile of your credit union.

Examiners will assess liquidity management by evaluating:

• The potential effects of changing interest rates on the market value of assets and borrowing capacity.
• Scenario analysis for liquidity risk modeling, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts).
• Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds).
• The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

Resources and guidance on liquidity risk can be found in the NCUA’s Examiner’s Guide.

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