Whither the CLF?

The closing down U.S. Central (USC) Bridge in October and ending its Central Liquidity Facility (CLF) agent membership could cause a significant contraction in the CLF's statutory borrowing authority and adversely impact many credit unions access to emergency liquidity.

The CLF was established in 1979, before credit unions had access to the Federal Reserve’s Discount Window or advances from a Federal Home Loan Bank. Currently for most credit unions, there only source to emergency liquidity is the CLF by belonging to a corporate credit union that is in turn part of the agent group headed by USC Bridge.

When the CLF redeems USC Bridge's CLF capital stock, the existing agent group arrangement will terminate. As a result, the roughly 6,000 natural person credit unions that get CLF access through their corporates will no longer have it.

Moreover, the borrowing authority of the CLF could drop by 96 percent after the redemption of U.S. Central Bridge's CLF stock holdings, limiting its ability to address a systemic liquidity event within the credit union industry.

As of May 31, 2012, the CLF had total subscribed capital stock and surplus of $3.85 billion, including about $1.8 billion in stock held by USC Bridge as agent. The statute permits CLF to borrow up to 12 times its total subscribed capital stock and surplus, which translates into approximately $46 billion in borrowing authority.

After the redemption of the stock occurs, the total capital stock and surplus of the CLF will be only about $155 million, which equates to a borrowing authority of around just under $2 billion.

The key policy question is whether the credit union industry will step up to recapitalize the CLF through the purchase of CLF stock by corporate credit unions acting as agent group representatives or the direct purchase of CLF stock by FICUs.

However, the NCUA Board in its proposed emergency liquidity rule noted that many corporate credit unions cannot afford to purchase stock for all their member credit unions, as required by the Federal Credit Union Act and NCUA regulations. A corporate credit union acting as an agent for its members must subscribe to CLF capital stock in an amount equal to 0.5 percent of its paid-in and unimpaired capital and surplus of its members.

It seems that the NCUA Board is counting on natural person credit unions to directly purchase the CLF stock in order to maintain the CLF as a viable liquidity option. I'm skeptical that this is going to happen.

Therefore, many credit unions are going to lose access to the CLF as a source of emergency liquidity and it seems that the borrowing capacity of the CLF will be greatly diminished. This would suggest that the CLF will not be able to adequately meet the liquidity needs of credit unions during a systemic liquidity event.