LENEXA, Kan. - U.S. Central FCU said it has been approved to access the Federal Reserve’s credit facilities, including intraday credit and the discount window.
Officials at the central bank for credit unions said they have been working with the Fed for more than a year to reduce risk in the payments system and improve efficiency in the payments process for credit unions.
The accelerating move to electronic payments has increased the need for intraday credit, said David Dickens, chief financial officer for U.S. Central.
The increasing electronic payments are being posted earlier in the day, making access to the Fed’s intraday credit an important option, according to Brad Miller, director of the Association of Corporate CUs. “Settlement is happening earlier and earlier in the day and we want to ensure that we have that liquidity available,” said Miller.
But the move also comes as U.S. Central is dealing with a balance sheet that has been deeply effected by the mortgage crisis. At the end of March, U.S. Central had marked down the value of its huge mortgage backed securities portfolio to show a loss of $1.96 billion, up from a loss $1.1 billion at year-end.
U.S. Central reported it lost $3.1 million for the month of March, which cut its first quarter net income to $8.1 million, down 63% for the same period last year.
Dickens is confident they have adequate liquidity to hold the securities to maturity, and thus erase those losses. “Absolutely,” he said. “It is possible to hold it to maturity and we expect to.”
Over the past year, the stigma of borrowing from the Fed’s discount window has dissipated. The Fed itself encouraged banks to tap the emergency lender last August to help ease the liquidity crunch at the height of the mortgage crisis. That led several large banks, including Citigroup, JPMorgan Chase, Bank of America and Wachovia, to announce publicly they had tapped the discount window for emergency loans.
U.S. Central, which manages $45 billion in credit union funds, sees the Fed’s discount window only as a “lender of the last resort,” said Dickens. He cited other sources of liquidity available, including a $15 billion line of credit with the Federal Home Loan Bank of Topeka, a $4 billion line of credit with commercial banks, and an active commercial paper program. “This is another source of liquidity,” he said.
Federal Reserve policy requires all financial institutions to deposit non-interest bearing funds, known as sterile reserves, in order to gain access to the discount window. Dickens said U.S. Central will begin depositing sterile reserves with the Fed.
“With access to Federal Reserve credit, U.S. Central has further strengthened the resources available to assure that we will be in a much better position to fulfill our role a liquidity provider to the corporate credit union network,” said Francis Lee, president of U.S. Central, in a prepared statement.
