DALLAS - The three most important words for credit unions today: liquidity, liquidity, liquidity.
That was the message from Emily Moré Hollis, CFA, partner with ALM First Financial Advisors, LLC, a fee-based financial advisory firm based here.
Credit Union Journal: What sort of risk management strategies is ALM First advising credit unions to take?
Hollis: Now is not the time to take undue risks. Do your due diligence on your members' financial strengths and be careful of mortgage loans and home property values. Most economists project that housing properties need to drop by more than 15% to maintain market stability.
CUJ: Do you believe there are any "risks" in the market that CUs may be likely to not think about or that they need to think about differently?
Hollis: Liquidity risk is a primary concern that should be addressed by all credit unions. The risk is one of forced divestitures, if withdrawals should occur. Raw loans in the form of cars, home equity lines of credit, non-conforming mortgages and commercial loans can only be sold in the secondary markets at a fraction of book value, so don't rely on loan sales to generate liquidity. Each institution should have multiple lines of liquidity and utilize all options, including corporate credit unions and the Federal Home Loan Banks.
Leveraging should be avoided unless access to liquidity is plentiful in the form of agency and corporate share certificates. There are opportunities out there to produce good income in safe leverage trades, but you have to have staying power-and a lot of guts.
Stay out of mutual funds that are not totally backed by agency or Treasury securities for now. Don't invest in any products that have "single event risks," such as negotiable bank CDs. Agency mortgage securities which have the explicit guarantee of the U.S. Government are fine, but stay short.
Lastly, educate your members. The credit union industry is safe, and is not burdened with problems like most banks. Make certain they understand that their deposits are insured like the banks and you don't own "toxic securities."(c) 2008 Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
