Fed's Discount Window, not CLF, Best Source of Systemic Liquidity

ABA wrote NCUA that the Federal Reserve’s Discount Window is the logical governmental backstop to address systemic liquidity events, not the Central Liquidity Facility (CLF).

NCUA issued an advanced notice of proposed rulemaking requesting comments on whether federally insured credit unions (FICUs) should have access to backup federal liquidity sources for use in times of financial emergency and distressed economic circumstances.

For most FICUs, indirect membership in the CLF is their only source of emergency federal liquidity. However, the ability of the CLF to address a systemic liquidity event could be seriously impaired by the 2012 closure of U.S. Central Bridge Corporate Federal Credit Unions and the redemption of its CLF stock. The borrowing capacity of the CLF is equal to 12 times its subscribed capital stock plus surplus.

In its January 18 comment letter, ABA noted that the CLF was created during an era when credit unions did not have access to alternative federal sources of liquidity, such as the Federal Reserve or the Federal Home Loan Banks. Today, FICUs have access to multiple sources of federal emergency liquidity.

ABA commented that the Federal Reserve’s Discount Window is a superior choice of emergency liquidity; because the Discount Window, unlike the CLF, does not have any limitations on its borrowing capacity. ABA wrote that the NCUA Board should encourage FICUs, especially larger FICUs, to apply for access to the Discount Window.

In addition, ABA recommended that NCUA “should take appropriate measures to limit taxpayer exposure to the CLF.” ABA noted that the CLF has been used as a vehicle for the NCUA to dispense financial assistance from the National Credit Union Share Insurance Fund (NCUSIF) to failing credit unions. In its 1997 study, The Department of the Treasury noted that the CLF could advance funds to the NCUSIF without regard to its ability to repay and in a systemic crisis, taxpayers could be put at risk, if these advances are used to shore-up troubled credit unions or a troubled insurance fund.

Read the letter.