Changes to NCUA's liquidity tool should sunset at year-end
As part of the Coronavirus Aid, Relief and Economic Security Act, Congress expanded the borrowing authority for the National Credit Union Administration’s Central Liquidity Facility through the end of 2020.
Specifically, the CARES Act temporarily made it easier for credit unions to join the CLF, including permitting corporate credit unions to act as agents for natural-person credit unions. The law also temporarily increased lending capacity through the facility, from a multiplier of 12 times an institution’s capital to 16 times, a provision set to expire at the end of the year.
Now, credit union trade groups – along with members of the National Credit Union Administration board – are advocating to extend this borrowing authority through the end of 2021. Some want to make these changes permanent.
However, the evidence does not justify this extension. In fact, it might be time to consider eliminating the Central Liquidity Facility, as the Department of the Treasury recommended in a report all the way back in 1997.
According to the CLF’s monthly financial statements, no credit union borrowed from the Central Liquidity Facility during the first seven months of this year. The evidence indicates that credit unions rarely use the tool. Just one credit union borrowed from the CLF during the last several years and the amount borrowed was $1 million. It is obvious that this amount could be adequately handled without expanding the facility’s borrowing authority.
Furthermore, credit unions have ample other sources of liquidity, from corporate credit unions and other financial institutions to the Federal Reserve’s Discount Window and Federal Home Loan Bank advances.
For example, as of June, 1,546 credit unions were members of the Federal Home Loan Bank system. By comparison, fewer than 300 credit unions were CLF members at the end of May, though corporate credit union participation meant about 70% of the industry was eligible to work with it if needed. The Central Liquidity Facility is an anachronism. It was created in 1978 when credit unions did not have access to the Federal Reserve Discount Window or the Federal Home Loan Banks.
Moreover, unlike the financial crisis of 2008 and 2009, liquidity does not seem to be a concern for the credit union industry. Our financial system is awash with liquidity. According to the Credit Union National Association, deposits at credit unions were up 13.26 percent through the first six months of 2020. This is the fastest growth rate in deposits since the 1980s.
It is clear there is no need to extend the Central Liquidity Facility’s enhanced borrowing authority beyond the end of this year.