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AFIAA Conference Liquidity Management

AFIAA Conference Liquidity Management. Current developments to meet prudential standards. Overview!. CU industry snapshot Recap current liquidity standards; CU current liquidity performance; Post GFC APRA liquidity standard review; CU Funding sources; CU Investment sources ;

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AFIAA Conference Liquidity Management

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  1. AFIAA ConferenceLiquidity Management Current developments to meet prudential standards Credit Union Financial Support System - CUFSS

  2. Overview! • CU industry snapshot • Recap current liquidity standards; • CU current liquidity performance; • Post GFC APRA liquidity standard review; • CU Funding sources; • CU Investment sources; • RBA ESA & Repo’s; • CUFSS commercial • 52 Mergers – reasons and causes; • Questions. Credit Union Financial Support System - CUFSS

  3. CU Industry Snapshot –March 2010 • BS Assets $46 billion • Sec Loans $6 billion • Growth 6.27% - losing MS • Capital strong 8.46% • Liquidity strong 16.28% • Net interest margin competitive 2.75% • Profitability moderate 0.63% ROA • Costs to income moderate 74.37% • Delinquency very low 0.77% • Consolidation – average 12 p.a. Credit Union Financial Support System - CUFSS

  4. Liquidity Standards APS210 Objective – maintain sufficient liquidity to meet obligations as they fall due across a wide range of operational circumstances Responsibility Board and Management • implement policy • ensure compliance to APS • Review annually; • agree with APRA • inform APRA Credit Union Financial Support System - CUFSS

  5. Liquidity Risk Policy inclusions • Risk appetite; • Measurement system; • Procedures to manage; • Define responsibilities & controls; • Formal contingency plan; • scenario analysis • (MLH exempt) Operational liquidity needs 15% Minimum 9% of total adjusted liabilities Credit Union Financial Support System - CUFSS

  6. HQLA “must be free from encumbrances” • Cash • RBA re-purchase securities; • ADI “investment grade” bank bills, CD’s; • ADI deposits (call or 2 day convertible; • Others securities approved by APRA CUFSS 3.2% MDR EXEMPTED Credit Union Financial Support System - CUFSS

  7. CUFSS HQLA Credit Union Financial Support System - CUFSS

  8. CU HQLA BANDS Credit Union Financial Support System - CUFSS

  9. APRA review of ADI Liquidity risk Process: • APRA announced mid 2008 – middle “CC” just before “GFC”; • APRA Discussion paper issued September 2009; • Advise early 2010 implementation deferred due to BASEL II till late 2010 Key recommendations: • Definition of HQLA – RBA repos & Gov’t securities; • MLH to continue; • Enhanced reporting; • Scenario planning; • Board strategy re risk tolerances; • Operational dependence; • External auditor role; Public disclosure. Credit Union Financial Support System - CUFSS

  10. CU FUNDING – AR June 2009 Credit Union Financial Support System - CUFSS

  11. Where the funding comes from? Credit Union Financial Support System - CUFSS

  12. Margin squeeze an ongoing challenge in normal times but more severe in this market Credit Union Financial Support System - CUFSS

  13. CU FUNDING SOURCES • 5 CU’s below 75% range from $2.8 million - $185 million; • 3 rely on strong retained profits; • 2 rely on wholesale deposits from other CU’s , Bridges and borrowings – model flawed? Credit Union Financial Support System - CUFSS

  14. Inter CU Depositing/Lending • Quantified at $355 million; • Biggest individual lender $145 million; • Biggest receiver $77 million; • Is a risk in that in the event of a liquidity crisis funds will probably need to flow back to lender • APS 210 Liquidity standards do not require borrowings to be offset in HQLA calculations • Issue of double counting HQLA? Credit Union Financial Support System - CUFSS

  15. CU INVESTMENT – AR June 2009 Credit Union Financial Support System - CUFSS

  16. Where we invest our funding? Credit Union Financial Support System - CUFSS

  17. Reserves / Capital Credit Union Financial Support System - CUFSS

  18. CU RESERVES/CAPITAL Credit Union Financial Support System - CUFSS

  19. RBA Exchange Settlement Accounts (ES) • Accounts held with RBA by banks to meet inter-settlement obligations; • RBA introduced term deposit (usually 1-2 maturities) facility Oct 08 for ES holder; Credit Union Financial Support System - CUFSS

  20. RBA Repurchase Agreements (REPOS) RBA buys securities for agreed term • Term before GFC were usually 3 months offered usually weekly; • GFC extended to 6 and 12 months with daily offerings; • The collateral ranges from government securities to private securities and residential mortgage backed securities (RMBS) Credit Union Financial Support System - CUFSS

  21. Access to RBA Market Operations ESA/REPO/RITS • All banks; • BS – IMB, Greater, Heritage, Rock; • Cuscal, Indue, ASX, ASL. REPO/RITS • Wide Bay; • State Gov’t treasury’s • NSW Police CU PROCESS • 18 -24 months; • No blueprint; • Significant management time; • $20k direct costs; • Strong RBA due diligence; Credit Union Financial Support System - CUFSS

  22. CUFSS Functions: • Administer the “Emergency Liquidity Support Scheme”; • Monitor members Liquidity, Capital and Profitability; • Liaise with members and regulators Profile: • 92 members (86%); • $39.4 billion assets (86%); • Access to 1.3 billion via MDR 3.2%; • Operating budget $350-400k Credit Union Financial Support System - CUFSS

  23. Has the self regulated emergency liquidity support system been successful? • No depositors have lost deposits or interest; • No member liquidations or adverse media stories; • One depositors have lost deposits or interest; • No member liquidations or adverse media stories; • One intervention to invoke emergency support to avoid potential reputation risk; • Early consultation between many mutual ADI’s & CUFSS has worked to resolve issues or facilitate solutions and voluntary mergers; • Close consultation between CUFSS, APRA, Cuscal and CU’S; • Quarterly statistical reporting to all members. Credit Union Financial Support System - CUFSS

  24. 52 Mergers 2005-2010pressures to merger Credit Union Financial Support System - CUFSS

  25. Causes for 52 mergers 2005 -2010 Some lessons • 20 of the 52 mergers 2005 – 2010 have not guaranteed them a long term future; • Member services only marginal; • Board politics; • KPI’s did not improve; • Multi-branding; • Some illogical bond fits; • No liquidity issues have forced merger Credit Union Financial Support System - CUFSS

  26. Thank you - Questions! Gary Eggert Executive Officer Credit Union Financial Support System (CUFSS) Level 1 1 Margaret Street SYDNEY geggert@cufss.com.au / Telephone 02 82999009 Credit Union Financial Support System - CUFSS

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