CFO CURRENCY: Scenario Testing: A Key To Sound Liquidity Risk Management



Poor liquidity and risk management strategies, an inability to project cash flow, inadequate contingency plans—when it comes to your credit union’s asset do these scenarios sound a lot like you? Our resident CFO currency expert provides sound advice to turn yourself around.

Liquidity continues to be a hot topic both in the financial news and among regulators and the financial institutions they examine. Although liquidity is vital for meeting cash and collateral obligations at a reasonable cost, many credit unions have poorly developed plans to manage their liquidity or the risk associated with it. These institutions typically don’t have adequate liquid assets, are unable to project cash flow and/or are using longterm assets to fund volatile liabilities.
Further, while final regulations issued in the past year require all federally insured credit unions with complex balance sheets or more than $50 million in assets to have formal contingency plans, many still do not. Or if they do, they are often inadequate.
At the heart of the federal rules requiring contingency funding plans is the need to promote sound liquidity management. As the lifeblood of a financial institution, the importance of having sufficient liquid assets to meet both anticipated and unanticipated needs can’t be overstated.

Scenario Testing
All financial institutions must be ready with adequate funding for any phase of the economic cycle to avoid disrupting daily operations or, worse, endangering their financial condition. A salient lesson from the financial crisis is the importance of anticipating potential threats and developing scenarios for dealing with them. At ALM First Financial Advisors, we recommend the following steps:

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