Recommendations for Reforming the CLF

While the testimony of National Credit Union Administration (NCUA) Chairman Debbie Matz in July did not mention the Central Liquidity Facility (CLF), the agency has stated previously that reforming the CLF is a legislative priority. However, NCUA has not released any details on how it would reform the CLF.

While I believe the CLF should be dissolved, if Congress decides not to dissolve the CLF but rather to reform the CLF, some of these reforms should closely follow the Federal Reserve's regulation regarding the extension of credit by Federal Reserve Banks.

CLF policies and procedures need to be designed to ensure that any lending program or facility is for the purpose of providing liquidity and not aiding a failing credit union. Legislation should prohibit borrowings from the CLF by credit unions that are insolvent or not viable.

Moreover, the Government Accountability Office (GAO) in 1991 recommended requiring the terms and conditions of CLF loans to be no more liberal than those made by the Federal Reserve.

Also, any reform needs to ensure that the security for CLF loans is sufficient to protect taxpayers from losses. The Federal Credit Union Act (FCUA) states that loans may be advanced to a member of the CLF on terms and conditions prescribed by the Board after giving due consideration to creditworthiness. But FCUA does not require CLF loans to be collateralized.

In addition, a 1997 Treasury Department study noted, "[t]he CLF’s current borrowing authority raises serious policy and budget concerns. It has legal authority to advance several billion dollars to the Share Insurance Fund without regard to its ability to repay. In a systemic crisis, taxpayers could be put at risk if such funds were advanced to shore-up troubled credit unions or a troubled insurance fund."

Furthermore, as I wrote in August 2010, the CLF should be subject to the same disclosure requirements as the Federal Reserve as mandated by Section 1103 of the Dodd Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203).