Like other financial institutions, credit unions are obligated to be good stewards of their members’ money. Maintaining the credit union’s long-term financial health and reliability requires more than just assisting members with services.
In the past few years, economic shifts have resulted in credit unions sometimes having excess liquidity. This increase in credit unions’ investment power can result in higher interest rates for members’ saving accounts and lower interest rates on loans, meaning more money back in members’ pockets.
Earning assets isn’t always a simple science, however. Here’s what you need to know about credit unions’ investments and the use of excess liquidity to increase your savings.
What is Excess Liquidity?
Excess liquidity occurs when a company or financial institution has more assets than they use, making it an inefficient use of their money. For example, they may have money to invest in stocks or spend on other investments rather than leaving it in an account.
This is necessary to keep an organization’s net worth growing. Because a credit union’s goal is to benefit its members, excess liquidity usually occurs when members’ savings accounts grow faster than expected.
All organizations should keep some reserves on hand to fulfill their legal obligations and meet general best practices for financial health. However, they should also be prepared to use excess liquidity to respond to economic changes and secure as much share growth as possible for investors.
Causes of Excess Liquidity
In short, excess liquidity is a sign that a bank or credit union’s members are doing well. Excess liquidity only occurs when there is more money in customers’ savings and checking accounts than the account managers anticipated. This may occur because the economy overall is doing well or because of variables affecting the institution’s account holders specifically.
Excess liquidity is usually temporary, so the institution needs to maintain realistic expectations and use it wisely. Institutions might consider investing that money for short-term or long-term growth.
Credit Unions’ Investment Portfolios
Like banks, credit unions maintain investments to help grow their members’ money. By investing excess liquidity wisely, credit unions may be able to temporarily increase the dividends they pay out to members with savings accounts.
Credit unions invest money in stocks, bonds, and mutual funds, all of which have varying terms. Because of how some gains are spread out over time, you might not see dramatic gains in your account’s dividends even when the economy is doing well. Your credit union should be working hard behind the scenes to manage its excess liquidity appropriately.
Your Credit Union’s Balance Sheet
Since a member-elected board controls credit unions, they are expected to be as transparent with members as possible. This includes releasing financial reports to members that give a detailed look at how well the organization’s finances are doing.
Your credit union calculates how much money they’re spending on operating expenses and general member services relative to interest income, fees, and other revenue. With this information, board members can make decisions that help steer the organization’s overall financial health.
In some cases, your credit union may use excess liquidity to increase the loans available to members. This investment in the members can generate more income for the credit union since those loans generate their own interest. If you ever have questions about what your institution is doing with your investments, ask a representative who specializes in savings accounts or other assets.
Choosing the Right Savings Account
Credit unions must consider multiple interests and obligations when deciding how to use excess liquidity, and their legal obligations and duty to future members play a large role. However, they still need to invest excess liquidity in a way that serves you and your family.
T&I Credit Union understands the importance of financial savings for families across the Detroit metro area. We work hard to make sure excess liquidity in our members’ savings accounts is reinvested in ways that give you short-term and long-term dividends. Since we’re a local organization, we also understand the need for personal loans, home equity lines of credit, and other loans for community members who need them most.
We’re committed to serving you now and in the future. Learn more about becoming a member by giving us a call at (248) 397-9345.