ALEXANDRIA, Va. - NCUA announced Friday it is pulling the funds for the Central Liquidity Facility, the industry’s $40 billion emergency loan fund, from deposits at troubled U.S. Central FCU and will invest them instead in U.S. Treasury securities.
The CLF, which has become the lifeline for the credit union movement through the financial crisis, is a unique entity which is owned by U.S. Central, but managed by NCUA–as a so-called government sponsored enterprise.
But since the failure of U.S. Central the dividend has been paltry, if in doubt. For the first quarter, the CLF paid a 1.3% dividend, down from 5.1% for the first quarter last year. The second quarter dividend is expected to be even less, or non-existent.
NCUA said Friday it is exploring options for transferring the primary ownership of the CLF from U.S. Central to other credit unions or groups of credit unions as part of the reform of the corporate network.
The CLF was founded in 1978 and is owned by U.S. Central, which holds 96% of its stock. Because of the advent of corporate credit unions has liquidity providers, the emergency fund was little used until the outbreak of the corporate crisis a year ago. Until then, the fund was allowed to borrow up to $1.5 billion, or ten times so-called paid-in-capital. But Congress last year expanded the capacity of the CLF to borrow from the Treasury to $40.5 billion. Since then, NCUA has used it to shore up both corporates and natural person credit unions, even having the National CU Share Insurance Fund lend the CLF $10 billion to support U.S. Central and WesCorp FCU after NCUA took both corporate giants under conservatorship on March 20.
Under the current structure, NCUA invests CLF funds in U.S. Central, then U.S. Central pays a dividend on those funds, and the dividends are then reinvested in U.S. Central.
U.S. Central, said NCUA, "currently owns the vast majority of CLF stock and the reinvestment of the stock proceeds back into USC is a circular transaction in which no funds actually exchange hands and results in a self-funded purchase of stock."
The current ownership structure could jeopardize the CLF’s ability to borrow from the Treasury because U.S. Central has negative capital. The failure of U.S. Central, said NCUA, "are now impacted by the accounting implications."
