10 THE NAFCU JOURNAL January–February 2023 THE LIQUIDITY BULLWHIP By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE Afeature of the COVID economy has been sudden, sharp changes in critical areas. The whipsaw behavior of supply chains, prices and interest rates makes financial management and forecasting extremely challenging. For credit unions and banks alike, liquidity is another area where conditions are changing rapidly. A survey of NAFCU members conducted in late August 2022 indicated that liquidity risk concerns were higher than at any point in recent history.1 This follows a period in 2020 and 2021 when financial institutions were awash in deposits and dealing with resulting dilution of their net worth. The suddenness of the change in liquidity conditions is prompting questions. Why did conditions change so quickly, and what that might mean going forward? Federal Reserve economists provided their perspective in two publications. A June 2022 study reviewed the extraordinary rise in bank deposits in the early stages of the pandemic. The authors cite four reasons for the explosive growth:2 ■ First, loan growth surged in 2020 as businesses drew upon their lines of credit. The old adage holds that loan creation results in new deposits as borrowers either stash their funds themselves or create deposits for others via consumption. Total business sector borrowings in the first half of 2020 were more than three times greater than in the first half of 2019.3 ■ Second, the asset purchases associated with the Federal Reserve’s monetary policy implementation created deposits under certain conditions. Where the Federal Reserve purchased Treasuries and mortgage-backed securities from institutions with reserve accounts, those transactions represented a simple swap of one asset (securities) for another (central bank reserves). However, purchases from nonbanks do create new deposits. ■ The other two deposit-generating impulses—fiscal stimulus and higher personal savings rates— were abundantly clear to credit unions as deposit surges peaked with the distribution of stimulus checks and account outflows slowed while the economy was shut down. 2020 2021 2022 Stock of Excess Household Savings (in $billions) $2,500 $2,000 $1,500 $1,000 $500 $0 Source: Aladangady et al.
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