What is the Year 2000 Liquidity Issue?
Higher than normal liquidity needs could occur as a result of one or more system failures, internal or external to the credit union, public perception and media influence, or a combination of any of the preceding. Though there may be some system failures, internal or external, which could hamper cash availability, NCUA does not expect major problems to be pervasive or widespread (see Appendix A for a further discussion on system failures). As credit unions and their vendors continue to address the overall Y2K issue, the Y2K liquidity issue moves closer to a public perception problem; which if not properly addressed, could result in an actual liquidity problem.
All credit unions should be aware of, and concerned about, media reports which recommend members to withdraw share deposits due to the century date change. To date, there have been several such media reports and articles. Such reporting may adversely impact your members’ perception of your credit union’s Y2K preparedness and cause an unwarranted outflow of shares.
Credit unions should view the Y2K liquidity issue from two perspectives: cash demand and liquidity demand. The cash demand perspective deals with physical cash needs such as ensuring sufficient cash supplies at key locations, transporting cash, and physical security precautions for cash. The liquidity perspective deals with managing the credit union’s assets (such as loans and investments) and liabilities (such as shares and external lines of credit) to ensure that the credit union can continue to fund all of its normal operations, including member cash needs.
Though this letter focuses on credit unions that offer cash services, those credit unions with non-cash operations will still need to address the Y2K liquidity issue. At a minimum, non-cash operation credit unions will need to assess, evaluate, and monitor their external liquidity sources (i.e. liquidity perspective) to ensure they can meet member needs.
What are the Risks to Credit Unions?
There are two extreme scenarios: (1) member demand for cash could exceed the cash supplies available to the credit union or (2) a credit union may position itself to have too much cash and its cash supply exceeds member demand.
In the first scenario where demand exceeds supply, the credit union will not be able to provide the services that members expect. This scenario could result in the erosion of member confidence in the credit union and the loss of member accounts. As these account funds leave, the credit union must find sources to fund the outflow of cash. These sources, such as lines of credit from other financial institutions, come at a cost which could negatively affect the ability of the credit union to operate.
In the second scenario where cash supply exceeds member demand, the credit union may have difficulty obtaining a sufficient return on its liquid assets to maintain profitability. Credit unions may be tempted to assume more risk, such as purchasing higher risk investments or making higher risk loans, to maintain profit and capital levels. Most likely, the mismatch between assets and liabilities (asset liability management) will increase subjecting the credit union to increased interest rate risk.
Finding a Balance
The key to successful Year 2000 liquidity planning is balancing the needs of your members with the needs of the credit union. Obtaining this balance is crucial for ensuring the financial condition of your credit union and for providing service to your members. Establishing this balance must be based upon realistic estimates so that you are prepared to meet your members’ cash and liquidity demands.
Credit unions need to pay particular attention to the security issues surrounding cash operations, especially in light of the additional attention the media will bring because of 3 the Y2K issue. Credit unions should specifically evaluate the necessary physical security of cash, such as transportation and storage, as well as member communications regarding the cash and liquidity issues. In other words, it may not be prudent to announce to the public that you have increased your onsite cash supplies unless you also announce that you have addressed the security concerns (Note: NCUA is not encouraging credit unions to publicly disclose their cash decisions. NCUA is simply encouraging credit unions to exercise care and prudent judgment regarding their disclosures).
What Does NCUA Expect?
NCUA expects credit unions to develop written Y2K Contingency Funding Plans (see Appendix B for a full discussion of contingency funding plans), approved by the board of directors, that address the issues and concerns raised in this letter and its appendices. Credit unions may incorporate the Y2K Contingency Funding Plans into their Business Resumption Plans or may develop stand-alone plans. NCUA expects credits unions to complete this task by June 30, 1999.
Cash Needs Analysis
NCUA expects all credit unions to perform an analysis of their cash needs for the periods prior to, during rollover, and immediately after the century date change. If you determine from that analysis that additional funds are not needed, NCUA still expects you to review your existing lines of credit to ensure they are adequate to meet unanticipated needs. In addition, the Y2K Contingency Funding Plan should require at least quarterly reviews of the credit union’s cash position and future cash needs prior to June 30, 1999, and monthly reviews after June 30, 1999, to ensure that the credit union may implement appropriate adjustments on a timely basis.
Member Awareness Campaign
NCUA urges each credit union, that has not already done so, to develop a member awareness campaign to address the Y2K issue. How each credit union elects to meet this responsibility is to be determined by the credit union. However, NCUA encourages credit unions to provide relevant Y2K information to their membership through their statement mailings (such as statement stuffers), news letters, specific Y2K statement issuances, websites, or other means determined acceptable by the credit union. In all cases, credit unions should discuss their Y2K statements with their attorneys prior to releasing the information. Credit unions should also ensure that any Y2K statement is made in accordance with the Year 2000 Information and Readiness Disclosure Act (available from our website, www.ncua.gov).
NCUA expects credit unions to educate key staff members on the credit union’s Y2K efforts. These staff members should be the individuals responsible for handling 4 member or media inquiries. A credit union’s reputation may suffer if erroneous information is disseminated. In addition, erroneous information could lead to a loss of member confidence in the credit union, result in significant share withdrawals, and lead to a liquidity problem.
NCUA expects credit unions to address liquidity planning as part of their overall Year 2000 Plan. NCUA also expects those plans to be sufficiently detailed to ensure that the credit union is able to provide services to their members. As part of their examinations and Year 2000 reviews, examiners will be reviewing credit union Y2K Contingency Funding Plans. Credit unions may send a copy of their completed Y2K Contingency Funding Plan to their examiner if they so desire. In the event that a credit union does encounter a liquidity problem, they should implement their contingency plans and contact their examiner.
If you have any questions, please contact your examiner, NCUA regional office, or state supervisory authority, in the case of state chartered credit unions.
Norman E. D’Amours
Chairman, NCUA Board