ALEXANDRIA, Va. – Credit unions are calling on NCUA to undertake major reforms to its emergency lending fund, the Central Liquidity Facility, which is endangered by the demise of its owner, U.S. Central FCU.
Shortcomings of the emergency lender, which is owned by U.S. Central and its corporate members but operated by NCUA, emerged during the 2007-2008 financial crisis, even as the fund was used to funnel $10 billion to a teetering U.S. Central itself, along with WesCorp FCU.
But credit unions see the structure of the fund as a dinosaur because of the difficulty in tapping into the fund and the growing number of liquidity resources for credit unions, including the Federal Reserve’s Discount Window and the Federal Home Loan Bank system. In fact these two sources acted as the leading sources of liquidity during the crisis, far eclipsing the CLF.
The demise of the corporate system, which acted as credit union’s first line of liquidity, has heightened concerns within the industry.
“America First believes that if the CLF was ‘modernized’ onto a convenient and reliable source of liquidity, with fewer restrictions on advances and same-day availability, credit unions would be much more willing to capitalize directly or indirectly through their corporate,” David Stacey, treasurer’s office manager for the Utah credit union giant, wrote NCUA in a recent comment letter on a proposed rule on liquidity backstops.
The CLF as currently structured is an odd duck. Its $1.5 billion in capital stock is owned by U.S. Central and its corporate “agents” of the CLF, but only half of the stock is actually funded, while the other half is on call in an emergency. In addition, the fund, which was created as a government sponsored enterprise similar to Fannie Mae and Freddie Mac, has a line of credit union of some $20 billion with the U.S. Treasury in times of emergency.
But with the planned phase-out of U.S. Central after the spectacular failure of the one-time $52-billion central bank for credit unions, NCUA is exploring a new structure for the CLF. Some question whether the CLF is even necessary and whether the same emergency loans could not be provided more efficiently through the National CU Share Insurance Fund.
Most credit unions agree on the need of an emergency backstop for the industry dedicated to credit unions, but the worry is the current structure makes it difficult to tap into the available CLF funds. For one thing, the CLF will only grant loans to those credit unions that are not in danger of failing (credit worthy) and can demonstrate a need of liquidity. For another, the CLF can take five days to approve an application and another five days to fund an emergency advance.
“The current requirements to establish direct membership with the CLF as well as the ongoing maintenance requirements are very onerous,” wrote Mark Dwyer, chief financial officer for San Antonio FCU. “The CLF should provide liquidity access in the most timely, efficient manner. Access to emergency funds should be available the same or next business day, as is the practice of the discount window.” He said the current five-day wait is “unacceptable in an emergency liquidity situation.”
“I am not supportive of continuing the CLF in its current structure,” wrote Bonnie Humphrey-Anderson, chief financial officer for OSU FCU. “It is ineffective for most natural person credit unions and adds unnecessary regulatory and operational costs for the industry to absorb.”
“As an officer of a credit union which has never seen the CLF as an easily accessible or reliable liquidity source, I feel that the CLF in its current structure should be shut down in an orderly way,” she wrote.
Humphrey-Anderson suggested if NCUA chooses to continue the CLF it restructure the fund along the lines of the Fed’s Discount Window, with no stock requirement and no delay in access.
Others agree that the CLF should be wound down.
“Responsible alternatives to the CLF exist for emergency liquidity for credit unions and for NCUA resolution resources,” wrote Chuck Bruen, president of First Entertainment FCU. “These alternatives should replace the CLF government-sponsored enterprise that exposes the United States Treasury, the taxpayers, and the credit union industry to unacceptably high systemic risk. Concurrent with the December 2012 wind down of the U.S. Central Bridge and its ownership of the CLF capital stock, the CLF should also be eliminated.”
