ALEXANDRIA, Va. – The plan introduced by NCUA this week to pump liquidity into the corporate network through the Central Liquidity Facility will only benefit a few corporates, including U.S. Central FCU, which have reported the largest losses on their books.
That’s because a key condition to offering the NCUA-guaranteed one-year notes in the so-called CU System Investment Program is that all proceeds from the offering be used to pay down external secured borrowings, and it is only the largest corporates that have such debt. According to Owen Cole, president of the CLF, that debt generally consists of advances from the Federal Home Loan Banks or the Federal Reserve.
NCUA will have its first offering of the notes early in January. The first offering will be of $500 million, with monthly offerings planned, according to Cole.
For the first time, U.S. Central, which only serves the corporates, will be offering the notes alongside its corporate members to natural person credit unions. NCUA’s Cole said that will allow natural person credit unions whose corporate is not participating in the program to participate through U.S. Central.
"The basic idea is to utilize the system to free up collateral for more borrowings," Cole told The Credit Union Journal yesterday. That will enable the corporates to continue holdings vast sums of illiquid assets on their books until the fog lifts on the financial markets.
Under the plan, natural person credit unions are being allowed to borrow from the CLF at 1.25%, on the condition the funds are used to buy so-called SIP notes at 1.50%–the 25 basis point spread is guaranteed courtesy of the U.S. government. Among the corporates with the most external debt, and thus expected to participate, are: U.S. Central, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU, Corporate One FCU, and Constitution State Corporate FCU. Those corporates are using the borrowings to enable them to continue to hold huge inventories of underwater assets, estimated at more than $12 billion for just those six corporates.
Corporates wanting to offer the SIP bonds must notify Cole at the CLF by next Friday, Dec. 19. Natural person credit unions wanting to take part must notify the CLF by Dec. 26, and the CLF will make the awards by Jan. 5, said Cole and funded by Jan. 9.
