This article was originally published in CU Today quarterly.
“Unprecedented”, a recurring theme since the pandemic hit over three years ago. Even though many of the financial crises our industry has seen recently tend to feel unprecedented, they are evidence of a cyclical economy.
How can credit unions discern when an economic cycle can be ridden out and when it’s time to bulk up protection measures?
The Silicon Valley Bank (SVB) collapse reinforced that it isn’t sound practice to neglect deposit growth and protection. The recent collapse, along with rising inflation compressing member savings and interest rates dampening loan velocity, are cause for portfolio diversification concern. Membership growth is at an all-time high in the credit union industry, yet deposits are not growing at the same speed. If this slow pace of deposits and lending growth are affecting your balance sheet, you aren’t alone. Ask yourself the following questions:
Does your credit union…
- Struggle to grow loans organically?
- Lack portfolio diversity?
- Feel stuck in manual lending processes?
- Feel in the dark with the risk level of loans?
- Choose to leave money on the table to potentially avoid losses?
- Hold a federal or state charter?
If you answered “yes” to at least one of these questions, it’s time to “lien” into new loan diversification options.
Lien into Second Loans
Second-lien loans don’t usually make the top of the “low-risk” list. While typically higher yielding, second-lien loans can carry more risk, more compliance concerns, and more burden on lending staff.
But they don’t have to be riskier.
Revamped second-lien loan programs now allow credit unions to acquire high-yield, second-lien loans that are tailored to a credit union’s unique risk appetite. That means your credit union can choose between acquiring a full or partial loan, thus managing loans at the level that’s the right match for your resources. Second loan pools can help your portfolio grow beyond organic loan growth alone. These alternate loans complement organic loan growth to optimize credit diversity and improve loan-to-share ratio. Pair with digital tools to search, buy, and service these loans, and your lending staff is equipped rather than burned out. Second-lien loans don’t have to add more to lending staff’s plates. Instead, an innovative, digitally serviced whole loan program can enhance portfolio performance with minimal lift.
When considering new, non-organic loan relationships seek out high-return, low-risk buying options from vendors that promote relationship transparency, accountability, and the highest compliance standards.
Access Liquidity through Federal Programs
There is another type of liquidity that can bolster loan diversification: Bank Funding Term Program.
Immediately following the collapse of SVB, the Federal Reserve made a move with a Term Funding Facility (TFF) to address accountholders questioning, “are my deposits safe?”
This particular SVB response program provides qualified financial institutions with access to liquidity. If the criteria is met, credit unions can apply and activate this program to ensure safer deposits. (Criteria includes, but is not limited to, federally chartered, US headquartered, adherence to certain financial stability and compliance regulations.)
The program aims to offset market stress when other credit options may be restricted and give financial institutions a greater sense of deposit stability. These loans range from highly short-term (i.e. overnight) to longer-term (i.e. up to three years) This is an appealing source of liquidity that comes with a fixed interest rate and can help credit unions withstand the proverbial economic bumps in the road.
This program continues to expand and evolve beyond the pandemic and time will tell how credit unions and their membership will benefit from BFTP long-term.
The Bottom Line
Recent and ongoing economic turbulence validate credit union concerns for seeking out credit growth options.
The good news: Economic downturns don’t have to catch your bottom line off guard.
How could the secondary loan market or government-backed liquidity support your credit union through these uncertain times?
Do you need to grow and diversify your portfolio while managing the liquidity crisis? Click here to learn more!