11 Corporate CUs Joined the CLF as Agent Member

The National Credit Union Administration (NCUA) announced on May 11 that all eleven corporate credit unions had joined the Central Liquidity Facility (CLF) as agent members for a subset of their members.

As agent members, the corporate credit unions have purchased the CLF capital stock for their member credit unions with assets less than $250 million.

This means that all credit unions with assets less than $250 million that are members of a corporate credit union are now eligible to apply for a loan from the CLF.

According to NCUA, this action has extended CLF coverage to more than 3,700 credit unions and increased the CLF’s borrowing capacity by over $13 billion.

This arrangement was made possible by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, it is temporary and will sunset on December 31, 2020.

Read more.

Bills Exempt Business Loans Made During Pandemic Emergency from MBL Cap

Legislation has been introduced in the House of Representatives and the Senate that will exempt business loans made during the COVID-19 pandemic from the aggregate member business loan (MBL) cap.

Representative Brad Sherman (D - CA) introduced on May 8 legislation (HR 6789) to exempt business loans originated by insured credit unions during the COVID-19 pandemic from the aggregate member business loan (MBL) cap until one year after the end of the COVID-19 emergency declaration.

The aggregate MBL cap for credit unions is 12.25 percent of assets.

The COVID-19 emergency declaration occurred on March 13, 2020.

The bill also extends temporary provisions dealing with the Central Liquidity Facility in the CARES Act, which were scheduled to expire at the end of 2020. The CARES Act expanded access to and increased the borrowing authority for the Central Liquidity Facility.

Co-sponsors of the bill include Reps. Don Young (R-AK), Brian Fitzpatrick (R-PA), Maxine Waters (D-CA), Suzanne Bonamici (D-OR), Vicente Gonzalez (D-TX), Eleanor Holmes Norton (D-DC), Joe Neguse (D-CO), J. Luis Correa (D-CA), Alan Lowenthal (D-CA), Jeff Van Drew (R-NJ) and David Trone (D-MD).

Senator Ron Wyden (D-OR) announced his intention to introduce a companion bill that would exempt the extension of credit to aid in the recovery of the COVID-19 emergency from the definition of a member business loan and thereby the MBL cap for one year. The bill states that the extension of credit must occur before the end of the one-year period beginning on March 13, 2020.

NCUA Issues CLF Interim Final Rule

The National Credit Union Administration (NCUA) Board issued on April 13 an interim final rule that will enhance the ability of the Central Liquidity Facility (CLF) to serve as liquidity backstop to the nation’s credit union system.

The rule makes it easier for credit unions to join the facility as a regular member or through a corporate credit union as part of an agent relationship, and access emergency liquidity should the need arise.

Specifically, the interim final rule:

• Eliminates the six-month waiting period for a new member to receive a loan;
• Makes temporary amendments to the waiting period for a credit union to terminate its membership;
• Eases collateral requirements on some assets; and
• Allows, temporarily, for an agent member to borrow for its own liquidity needs.

The interim final rule becomes effective upon publication in the Federal Register, and it will expire on December 31, 2020.

The NCUA Board urges all natural person and corporate credit unions to join the CLF, if they have not done so.

Read the interim final rule.

Additional Thoughts on Melrose

While I have commented on Melrose Credit Union's solvency, I have not focused enough attention on Melrose's liquidity position.

During the fourth quarter, Melrose, which is in conservatorship, had a deposit outflow of $102 million, as deposits fell from almost $1.716 billion to approximately $1.614 billion.

The credit union has $737.1 million in deposits that mature in less than one year.

In addition, it reported uninsured deposits of almost $41 million. These uninsured deposits pose a flight risk.

On the other hand, Melrose Credit union had $58.6 million in cash at the end of 2016. Its cash on hand fell by almost $124 million during the quarter

Cash and short-term investments were 3.92 percent of assets at the end of 2016. This was down from 9.66 percent on September 30, 2016; but higher than the 1.50 percent at the end of 2015.

The credit union reported uncommitted lines of credit of $175.7 million. This is down from $249.3 million from a year earlier. However, I am not sure that these lines of credit will be available.

Also, Melrose should have established a contingent emergency borrowing authority with either the Central Liquidity Facility (CLF) or the Federal Reserve.

The National Credit Union Administration does not comment on whether a credit union is a member of the CLF.

Furthermore, the conservatorship of Melrose may have closed its access the Federal Reserve's Discount Window.

Moreover, Melrose as of the end of 2016 has borrowed $55,643,796 from a Federal Home Loan Bank (FHLB). These advances from a FHLB are secured with assets and over-collateralized.

If Melrose is liquidated by NCUA, these advances from a FHLB would increase the size of the loss to the National Credit Union Share Insurance Fund, as FHLBs have super lien priority. This means that FHLBs claims come before the NCUSIF.

CUs Received More Than $120 Billion in Emergency Liquidity and Guarantees During Financial Crisis

Testifying before the House Financial Services Committee on December 8, National Credit Union Administration (NCUA) Chairman Debbie Matz provided information about the extraordinary measures that were taken by NCUA to support the credit union system during the financial crisis and Great Recession.

Chairman Matz noted consumer-oriented, member-owned credit union system suffered sizable losses, as a result of the financial crisis. Ninety retail credit unions failed because they were not holding sufficient capital to cover their risks.

Chairman Matz went on to state that the failure of five corporate credit unions had near-catastrophic consequences for all surviving credit unions, causing Congress to create the Temporary Corporate Credit Union Stabilization Fund.

Furthermore, she stated NCUA injected more than $120 billion of emergency liquidity and guarantees to stabilize the credit union system - more than $20 billion in liquidity assistance through the Central Liquidity Facility and over $100 billion in guarantees.

She also pointed out that NCUA borrowed $5 billion from the U.S. Treasury to support the credit union system.

Read the testimony.

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).

NCUA Provides Update on CLF Membership and Borrowing Arrangements at Fed's Discount Window

The National Credit Union Administration's Emergency Liquidity rule required all larger credit unions establish access to
a federal source of liquidity by the end of March 2014.

These federal sources of liquidity are the Federal Reserve’s Discount Window, NCUA’s Central Liquidity Facility (CLF) or both.

According to the 2014 Annual Report of the NCUA, the number of credit unions that were members of the CLF increased from 158
credit unions at the end of 2013 to 248 credit unions by the end of 2014. With the growth in CLF membership, the CLF's borrowing authority increased by $2.2 billion to $5.1 billion.

On the other hand, the number of federally insured credit unions that had arrangements with the Federal Reserve’s Discount Window increased, from 483 in 2013 to 663 by the end of 2014.

A Disappointing CLF Membership Rate

The National Credit Union Administration (NCUA) is putting its best face on a disappointing Central Liquidity Facility (CLF) report.

NCUA reported that credit union membership in the CLF increased by 69 percent between March 31, 2013 and March 31, 2014 to 218 credit unions and the maximum borrowing base had increased by almost 58 percent to $3.8 billion.

In an April 11 press release NCUA Chairman Debbie Matz said: "It’s most encouraging to see the CLF performing well."

As background, NCUA is requiring all federally-insured credit unions with at least $250 million in assets to establish access to at least one contingent federal liquidity source, either the CLF or the Federal Reserve’s Discount Window, or both by March 31, 2014.

According to year-end data (the most recent available), there were 770 credit unions with at least $250 million in assets. Assuming that all 218 credit unions that are CLF members are $250 million or larger in asset size, this translates into a CLF membership participation rate of credit unions with at least $250 million or more in assets of approximately 28 percent.

However, I suspect the CLF membership rate is even lower among the credit unions with at least $250 million in assets.

Among all credit unions, the CLF membership rate is a paltry 3.33 percent.

This would explain the decision by the NCUA to increase the CLF stock dividend rate from 10 basis points to 25 basis points. A higher stock dividend rate could make CLF membership a little more attractive.

Read the press release.

CLF Transparency, NOT!

I have been stonewalled by the National Credit Union Administration (NCUA) regarding two Freedom of Information Act (FOIA) requests for information about the Central Liquidity Facility (CLF).

The first FOIA was seeking a white paper submitted to Congress with recommendations to reform the CLF. Specifically, the Office of General Counsel’s 2013 Regulation Review states “NCUA prepared and submitted to Congress a whitepaper outlining certain recommendations for statutory changes that will enable CLF to move forward as a meaningful resource for the industry.”

The response from NCUA to this request was "[w]e have no responsive records." In other words, the agency cannot find the document, which it acknowledges was prepared and submitted to Congress. I guess NCUA deleted the whitepaper after it was sent to Congress.

The second FOIA request was seeking transactional information regarding credit union borrowings from the Central Liquidity Facility through the Credit Union System Investment Program (CU SIP) and the Credit Union Homeowners Affordability Relief Program (CU HARP) between November 1, 2008 and May 15, 2009. The transactional information requested was the name of the credit union, the amount borrowed, the interest rate on the borrowing, date of the borrowing, and whether the borrowing is associated with CU SIP or CU HARP.

NCUA denied my request in full. NCUA stated that "[t]he withheld information qualifies for protection under FOIA exemption 5 U.S.C. Sec.552(b)(8), protecting matters from disclosure that are contained in or related to examinations, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of inancial institutions."

NCUA did throw me a bone by providing aggregate information regarding CU borrowings under CU SIP and CU HARP (see below and click image to enlarge).


My request is similar to the request from Bloomberg for information about banks and other financial institutions that had borrowed from the Federal Reserve discount window during the financial crisis. Bloomberg's FOIA request was denied. However, Bloomberg sued the Federal Reserve and the Federal Reserve was required to release the data.

In addition, I do not know how these borrowings from the CLF had anything to do with examinations, operating, or condition reports of the natural person credit unions. The funds borrowed from the CLF under these two programs were required to be deposited into two floundering corporate credit unions that ultimately failed and were guaranteed in full.

This is just another example of NCUA abusing the exemptions under FOIA to deny the public access to relevant information.

Emergency Liquidity, Central Liquidity Facility and FHLB Advances

Unless credit unions have made arrangements to access the Federal Reserve's Discount Window, a vast majority of credit unions do not have a source of emergency liquidity with the closure of U.S. Central Bridge FCU last year.

At the end of June 2013, there were 140 regular members of the Central Liquidity Facility. While this is up from 95 federally-insured credit unions as of December 9, 2011; the number still represents a miniscule 2 percent of all federally-insured credit unions.

Moreover, NCUA Chairman Debbie Matz during a July 18 Town Hall Meeting re-iterated the agency's position that it is highly unlikely that Federal Home Loan Bank advances will be treated as a source of emergency liquidity.

NCUA Chairman Matz said:

"We believe that the Federal Home Loan Banks are a great resource for credit unions for the purpose that they were intended, which is to provide liquidity to meet mortgage needs. Federal Home Loan Banks are not an emergency source of liquidity. And so when we do ultimately have a rule – and we do not have a timetable for that yet – we do not anticipate that they will be qualified as end-users for emergency liquidity."

CUs Have Received Significant Support from the U.S. Treasury

In describing the difference between banks and credit unions, Public Service Credit Union on its website wrote "[i]n the entire history of U.S. credit unions, taxpayer funds have never been used to bail out a credit union."

However, is this statement correct?

The evidence would suggest that credit unions have received significant assistance from the U.S. Treasury and thus the American taxpayer in recent years, although credit unions are exempt from paying corporate income taxes.

According to the National Credit Union Administration, the Central Liquidity Facility borrowed more than $18 billion from the U.S. Treasury in 2009 to stabilize two failed corporate credit unions -- U.S. Central and Western Corporate Federal Credit Unions.

In addition, the Temporary Corporate Credit Union Stabilization Fund has borrowed more than $11 billion from the U.S. Treasury to handle the resolution cost of failed corporate credit unions. Over $5 billion of the borrowings from the U.S. Treasury is still outstanding.

No Corporate CUs Participating in CLF as of October

The October financial report for the Central Liquidity Facility (CLF) shows that no corporate credit unions have stepped up to act as agent members, despite the efforts of the NCUA Board.

The NCUA Board tried to encourage corporate credit union participation in the CLF by modifying the definition of net assets for calculating the leverage ratio to “total assets less CLF stock subscriptions, loans guaranteed by the NCUSIF, and member reverse repurchase transactions.”

However, most, if not all, corporate credit unions cannot afford to purchase CLF stock as an agent for their members. 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.

As a result, the borrowing capacity of the CLF has dramatically fallen with the redemption of U.S. Central Bridge FCU's CLF stock.

View the report.

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.

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.

NCUA Proposal Would Artificially Inflate Corporate CU Leverage Ratio

In a comment letter filed with NCUA on October 5, the American Bankers Association opposed excluding Central Liquidity Facility (CLF) stock subscriptions from the definition of net assets, which is the denominator of the leverage ratio for corporate credit unions.

NCUA is proposing to deduct CLF stock subscription from net assets, because it believes CLF stock subscription poses negligible credit risk and will help address systemic liquidity needs of natural person credit unions.

However, deducting CLF stock subscription is an accounting gimmick that would artificially inflate the leverage ratio for corporate credit unions, making them appear less risky than they really are.

The four percent leverage ratio requirement is intended to ensure that credit unions maintain a minimum amount of capital as protection against risks that are not captured by risk-based capital standards, risks that by definition are unknown or unknowable. The leverage ratio is a recognition that risk models are subject to significant error, which the recent financial turmoil affecting banks and credit unions alike made all too clear. The leverage ratio should not be influenced by fallible estimates of the riskiness of the assets.

Additionally, if NCUA believes that the credit risk posed by CLF stock subscription, is negligible, then this is best addressed through the risk-based capital requirements for corporate credit unions and not the leverage ratio.

Moreover, arguments that the proposed definitional change in net assets is necessary to meet the systemic liquidity needs of natural person credit unions ignores the fact that credit unions have other alternative sources of liquidity already available to them.

First, credit unions can meet their liquidity needs by becoming members of the Federal Home Loan Bank (FHLB) system. As of June 2011, NCUA is reporting that 1,047 federally-insured credit unions were FHLB members.

Second, almost all credit unions, except for the smallest, can make arrangements with the Federal Reserve to access the discount window to meet emerging liquidity needs.

Read ABA's Comment Letter.

CLF Should Be Subject to Same Transparency Reporting Requirements as Fed's Discount Window

The National Credit Union Administration’s Central Liquidity Facility (CLF) should be subject to the same transparency reporting requirements that applies to the Federal Reserve as dictated by Section 1103 of the Dodd Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203).

Section 1103 requires the Federal Reserve to disclose in timely manner information concerning the borrowers and counterparties participating in emergency credit facilities, discount window lending programs, and open market operations.

For discount window loans extended on or after July 21, 2010, the Federal Reserve will publicly disclose the following information, generally about two years after a discount window loan is extended to a depository institution:

• The name and identifying details of the depository institution;
• The amount borrowed by the depository institution;
• The interest rate paid by the depository institution; and
• Information identifying the types and amounts of collateral pledged in connection with any discount window loan.

The CLF was established in 1978 to provide emergency liquidity to credit unions and receives an annual appropriation from Congress. Since the CLF performs the same function of providing temporary liquidity as the Federal Reserve’s discount window, the CLF should be subject to the same disclosure requirements as mandated by Section 1103 of the Dodd Frank Act.

Also, any emergency credit facility, such as the Temporary Corporate Credit Union Stabilization Fund, should be subject to this disclosure requirement. NCUA disclosed that on June 14 the Stabilization Fund borrowed $810 million from the Treasury and these borrowings were to be deposited into corporate credit unions this summer, in order to raise liquidity within the corporate credit union system.

While the Dodd Frank Act does not require NCUA to disclose the name of credit unions borrowing from the CLF or other lending facilities, the agency should voluntarily comply with the requirements of Section 1103 of the Dodd Frank Act. Doing so would show the public that NCUA is serious about transparency and complying with the spirit of the law.