Can too much cash kill you? It turns out money can be the root of some evils, and holding on to too much of it can not only be hazardous to your credit union, but it harms your entire community!
When credit unions accept deposits, they have choices they need to make. They can take deposits, and they can make loans, or they can take deposits, and buy US government securities. Or they might just take those deposits and do nothing with them. Typically, this means, transferring the money to a corporate credit union, where the money will be lent out in another community.
When a credit union doesn’t use their deposits to make loans, it is foregoing lucrative interest rates. Credit unions need good interest rates on loans to fund operations and pay dividends on share accounts. When deposits are invested in government securities or left at a corporate credit union, they receive substantially lower interest rates. Therefore, it becomes more challenging to fund operations and pay dividends when money is invested that way.
If the credit union has too few loans, then they will not have enough interest to pay for operations. The interest received from government securities and deposits at corporate credit unions is simply too little to keep the institution viable long-term. This is how a credit union could start to fail, by simply holding on to too much money. In other words, too much liquidity can actually be fatal to a credit union!
Many executives may complain there is a lack of loan demand, which is why they involuntarily hold so much liquidity. Loans can be diverse products, and they should consider if additional loan products can be offered. Maybe you have reached your full potential of automotive and home loans, but what about recreational vehicles? What about businesses and agriculture? What about lending to non-profits and local government entities? If you don’t have the experts to do these loans, then consider hiring them. The better yield on these loans will easily pay for the experts and still prove better than holding cash and securities. And best of all, this puts local deposits to work in your community!
The NCUA has also thrown a lifesaver to many credit unions drowning in liquidity. Starting in 2017, purchased loan participations will no longer be classified as member business loans (MBLs). This means there will be no limit on the number of loan participations a credit union can purchase. This means, credit unions can tap into loan participations all over the country, forever mitigating the issue of retaining too much liquidity. Although to mitigate the risk of lending out-of-territory, it may be best to select a few specific markets and build an expertise in them.
Credit unions are not-for-profits, but clearly they need to make some profit to fund operations, protect against loan losses and replenish capital. The best way to do this is by making loans, and making loans reinvests deposits in the local community. If the credit union is truly suffering from a lack of loan demand, they can always buy participations. If a credit union does not do these things, they will suffer under the weight of holding too much cash and securities. And it seems silly to say it, but too much cash can actually be detrimental for a credit union.