For more than a decade now, the securitization of credit assets and the emergence of what has been called the ‘originate-to-distribute’ model have marked a fundamental change in credit markets with major implications for balance sheet and liquidity management.
Credit unions have been able to originate much higher volumes of credit assets than they would otherwise have had the capacity for, which in turn enabled them to boost revenues from origination fees or to skim margins off assets prior to their transfer. However, such a flow model relies on the continuing appetite by institutional investors (including other banks) for these assets, which are a major source of liquidity (and liquidity risk).
But when the interbank market contracts, as it did in the summer of 2007, the liquidity gauge begins to fall rapidly towards empty, with many managers failing to adjust their refueling strategies.
The shift by FIs towards much higher levels of wholesale funding (to around 60% - 75% of balance sheet in some cases) and away from more stable customer deposits creates a greater dependence on other financial institutions.