Do credit unions really need five companies to manage $18B of statutory liquidity?

Investing statutory liquidity is a relatively straightforward business to manage. The benefits of scale and centralized expertise are clear. Yet credit unions currently split this business across five different companies. Why?

Canada's five credit union centrals manage about $18B of statutory liquidity on behalf of their member credit unions. Of this, almost half is administered by Central 1, the central for Ontario and BC. A further $14B or so of non-statutory deposits are also managed by the centrals and another $3B at two other shared liquidity providers.

Central 1 spent $39.3M to run their treasury group in 2022 (this includes both statutory and excess liquidity totalling approx. $20B). Duplicate treasury services exist in the other four centrals, plus at Concentra Bank and League Savings & Mortgage. Add in the cost of individual credit unions managing their own funds and the total cost of CU liquidity administration is in the hundreds of millions of dollars.

In contrast, Alberta's public sector pension spent a mere $14M to manage their $17B investment fund. Treasury and pensions are not directly comparable, but the cost difference is pronounced.

How can credit unions achieve liquidity management scale without merging the centrals? Read more here: 

What is statutory and excess liquidity?

Statutory liquidity
All deposit-taking financial institutions must keep a portion of their assets in reserve to withstand a run of withdrawals. Known as "high quality liquid assets", or HQLA, these assets can be "easily and immediately converted into cash at little or no loss of value" (ref). Examples include deposits at the Bank of Canada, demand deposits at other financial institutions, government bonds, quality corporate debt and similar instruments.

Most provincially-regulated credit unions are by law required to deposit their statutory liquidity in their provincial central, who then invests it in HQLA on their behalf. If a credit union experiences a liquidity crisis the central acts like a mini Bank of Canada and provides emergency cash. By pooling their resources, credit unions achieve better rates and can support each other in times of need. Deposit requirements vary by province but are in the range of 6-10% of each credit union's financial assets. In 2022, statutory deposits at the five centrals totaled approximately $18B.

Excess liquidity
Credit unions with more cash than needed can use their own treasury department or rely on an intermediary. Excess Liquidity does not have the same strict requirements as HQLA and can generate higher returns. Collaboration is especially import for smaller credit unions that lack the expertise and/or scale to achieve better pricing. Key providers of excess liquidity services are the centrals, Concentra Bank (now owned by EQ) and League Savings & Mortgage (owned by the Atlantic credit unions).

Excess liquidity at the centrals, Concentra and LSM totaled approx. $17B in 2022. A number of credit unions, particularly the largest, manage their own excess liquidity rather than go through an aggregator.

Note: Central annual reports do not consistently report statutory vs excess liquidity, so the above chart is a best estimate. Central 1's statutory liquidity is held off-book in a protected fund and managed by C1 via a cost-recovery contract. 

Reducing costs and improving returns

Merging the centrals is one method of achieving scale. Combining Ontario and BC into Central 1 and NB/NS/PE/NL into Atlantic Central was done in part to improve the efficiency and effectiveness of their treasury departments. Various other combinations have been considered, but not pursued. At this point further mergers are not necessary, nor particularly desireable. Mergers create complex governance models, require compliance with multiple regulatory regimes and distract from running credit union businesses.

However, the centrals are not prevented from handing over management of liquidity to a shared service. Indeed, this is already the case in Central 1 and the Atlantic, where individual provincial funds are managed by the parent company. A single treasury group could be built from the best of the provincial Centrals by creating joint venture or similar structure. Liquidity funds could even be administered by a third party, contracted out much like how a pension fund or endowment hires money managers. Funds remain on the books of the provincial Centrals and subject to all the usual oversight.

While there are provincial differences, HQLA is HQLA. By definition it is a low risk business. Provincial centrals are all investing in the same vehicles. There is no compelling strategic reason to manage them separately.

A $32B pool is respectable by Canadian standards. That's half the holdings of the OMERS pension fund, and about 10% of the $308B in financial institution deposits held by Canadian banks. If individual credit unions pooled their self-managed liquidity the fund would be even larger. Even with the complexity of managing segregated pools and multiple regulations this is an attractive business for a third-party money manager or credit union joint venture.

Managing change
This action would of course be controversial. Centrals are (rightfully) proud of their role in strengthening their provincial systems, and of their in-house expertise. And treasury alone won't solve the problem of reducing system costs. But there is no strategic benefit to running five different treasury services because of a collaboration model designed in the 1970s.

If credit unions want to become more efficient and effective, combining statutory and excess liquidity management is an excellent place to start.

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