Virtually every industry is hunkering down and preparing for what is expected to be a tumultuous economy in 2023. From hiring freezes to tightening budgets, companies are taking precautionary measures to shield themselves against impacts of an economic downturn. For financial institutions, liquidity, or lack thereof, is a top priority as we begin the new year.

A Changing Tide

Liquidity risk increased sharply over 2022 following nearly a decade of historically low rates, leaving many financial institutions with low-yielding loans. Last August, credit union liquidity fell to 28.9% from 35.2% in August 2021, marking the biggest year-over-year decline since July 2000. The cause for the drop over two decades ago is attributed to members buying stocks with their excess funds versus putting them in insured deposits at their local credit unions.

With rising inflation, consumers are pulling from their savings accrued during the pandemic to afford the increased costs of goods and services.

And with the Federal Reserve incrementally raising the national interest rate, people are less inclined than ever to refinance loans they secured last December, for example, when the average rate on a 60-month new car loan was around 3.85% (as of November, the rate is 6.05%). We expect the Fed to continue raising over the coming months.

Low inventory has also plagued the automotive industry and would-be buyers. However, Bloomberg recently reported that the industry is expected to grow by more than 1 million vehicles in 2023, totaling about 15 million units. While that’s still around 1 million below what automakers produced in recent years, it does bring hope that the industry can weather forthcoming economic stressors.

Add to the rate and increases and inventory uncertainty with affordability issues, and more people are looking to trusted financial institutions for realistic paths to vehicle ownership. While banks and credit unions have been increasingly facilitating the demand for car loans, liquidity concerns may overshadow loan generation.

What are the biggest barriers to vehicle ownership? And what role can financial institutions play in making it more accessible? Check out our latest research, “Driving Opportunity: U.S. Vehicle Accessibility Index 2023.”

Proactive Measures

So, what are some things financial institutions can do now to bolster their balance sheets? Some may have to liquidate assets at a loss and risk negatively impacting their net worth ratio. Others may need to borrow money to make loans while raising dividend rates. But there are other mitigation measures financial institutions can take to spur balance sheet growth. One of the most important is to ensure you’re pricing loans correctly.

Solutions like Open Lending’s Lenders Protection program can automatically assess a lender’s specific costs and risk levels to originate less risky auto loans. Our Lenders Protection Program was created to help lenders better withstand environmental risks, like today’s economic uncertainty. The program enables higher yields on assets you already have while increasing vehicle lending volumes outside your normal prime lending guidelines.

There is no blanket approach for banks and credit unions to navigate the liquidity crunch. Every institution has unique vulnerabilities and opportunities, which is why you continue to control all credit decisions with the Lenders Protection program. You can configure your specific costs and desired ROA to support your balance sheets and complement your liquidity management approach.

As you assess avenues to increase liquidity, consistent and accurate pricing and origination tools are critical. You need a partner who can help you reach profitability targets despite an unpredictable market and economy. Open Lending has been this partner to financial institutions for over two decades. We’ve enabled them to weather previous economic downturns and times of heightened risk. And we’re prepared and honored to support you now too.