Credit Union Liquidity: Déjà Vu All Over Again?

CUs find new ways to create liquidity.

From 2012 to 2018, the aggregate credit union loan-to-savings ratio rose by almost 20 points, from 68% to 86%, its highest level in 40 years. During those six years, loans outstanding grew by 73% (9.6% per year) while savings rose only 39% (5.6% annually). If these growth rates continue, the loan/savings ratio will reach 89% by the end of this year and 92.4% by the end of next. The credit union system doesn’t yet face a liquidity crisis, as it did in the late 1970s, but for many credit unions, tight liquidity is a pressing issue.

To help understand the current liquidity crunch and how to deal with it, it’s helpful to look back briefly at the liquidity crisis of four decades ago, when the loan-to-savings ratio reached 94%.  That liquidity drain occurred in a time of very high interest rates and a 12% federal credit union loan rate ceiling, which also applied for many state charters. Interest rates on Treasury Bills and deposits at banks and savings and loans at times exceeded 12%, so credit unions simply could not compete. Members even took out credit union loans to buy CDs at other institutions: Call it consumer arbitrage. Many credit unions had to take drastic actions to slow loan growth. The system-wide liquidity crisis even led to the creation of the NCUA’s Central Liquidity Facility and the modern corporate credit union system to source additional liquidity for credit unions. Soon after, with the lifting of the loan rate ceiling, credit union loan rates soared along with deposit yields, and the loan to savings ratio rapidly receded (helped by a temporary mandatory federal credit restraint program imposed on all consumer lenders in 1980).