CUNA Regulatory Comment Call
May 28, 1999
Y2K LIQUIDITY
This document discusses new sources of backup, Y2K liquidity for credit unions. These resources are in addition to credit unions’ own internal and external sources of liquidity, such as a corporate credit union and the National Credit Union Administration’s Central Liquidity Facility, which now as a result of legislation signed by the President May 21, 1999, may borrow more than $20 billion. This expanded borrowing authority for the CLF may be used to fund credit unions’ emergency Y2K liquidity needs.
In addition, to ensure credit unions will have liquidity beyond these resources if needed to fund unexpected Y2K member withdrawals, NCUA and the Federal Reserve Board have agreed to an arrangement under which access to the Fed’s discount window would be available to credit unions. Under the agreement, a state chartered, nonfederally insured corporate credit union has been chartered to interface with the Kansas City Federal Reserve Bank. The new corporate, U.S. Central Liquidity Corporate Credit Union, would post collateral and Regulation D reserves as required by the Federal Reserve. As needed, this corporate would obtain secured borrowings from the Reserve Bank and provide the liquidity to U.S. Central, which would distribute it to the corporate credit unions. The corporates would then distribute the funds to credit unions seeking additional liquidity.
Yet another source of liquidity could be available to credit unions. It is the Century Date Change Special Liquidity Facility on which the Federal Reserve Board is seeking comments. This special facility is the subject of this Regulatory Comment Call. Comments are due on or before July 2, 1999. Please submit your comments to CUNA by June 25. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to CUNA’s Senior Vice President and Associate General Counsel Mary Dunn at mdunn@cuna.com; or mail them to Mary in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also call Mary at (202) 218-7769 if you have any questions or would like a copy of the proposed rule. The rule is also available on the Internet at the following: http://www.bog.frb.fed.us/boarddocs/press/boardacts/1999/19990521/r-1038.pdf (PDF document requiring Adobe Acrobat Reader. If you don't have a copy, you can get one here).
PROPOSAL IN BRIEF
The proposed Facility would make collateralized Federal Reserve Bank credit available at 1.5 percentage points over the federal funds rate. The collateral requirements would be identical to those for other discount window loans, which must be fully collateralized as required by the Fed. Borrowers would not be expected to make portfolio adjustments to repay loans right away. Only institutions that are in sound financial condition would be able to borrower and credit unions would be required to have capital of at least 6%. Borrowers would not have to exhaust other sources before turning to the Special Facility. Institutions could use the Facility to meet fund shortfalls or to make loans or investments.
DETAILS OF THE PROPOSAL
Eligible Borrowers
Who may borrow from the Special Liquidity Facility would be discretionary with the Fed. However, all types of financial institutions would be able to apply for the credit, including credit unions. However, financial institutions that receive credit would have to be in sound financial condition and credit unions would have to have capital of at least 6%. Even if a financial institution meets minimum requirements, it may be denied credit if the Reserve Bank determines the institution is not in sound financial condition. The Fed may discuss the institution’s financial condition with the institution’s regulator.
Rate and Duration of Loans
The Board is proposing that the credit through the Facility be available from November 1, 1999 to April 7, 2000 and at a spread over the Federal Open Market Committee’s targeted federal funds rate.
Institutions would not have to make portfolio adjustments to repay loans promptly and loans may be outstanding for a considerable period until the program expires.
Collateral
Collateral requirements would be the same as they are for other discount window loans, which are fully collateralized as required by the Fed. Institutions would be required to pre-position collateral and have necessary authorizations signed to have access to credit the day it is requested. Unless the collateral is traded in active markets, the Fed would need time to determine the lendable value of the collateral.
Alternative Liquidity Sources
Unlike other lending from the Fed’s discount window, other sources of credit would not have to be exhausted before a borrower could obtain lending from the Special Liquidity Facility.
Use of Funds
Also unlike other credit from the discount window, there would not be restrictions on the use of the funds obtained. Credit through the Facility could be used to meet funding shortfalls caused for consumers making withdrawals, or could be used to make loans or investments.
Monitoring
When an institution obtains other forms of credit from the discount window, the Fed monitors its activities and institutions are required to supply balance sheet data to the discount window. Such monitoring and reporting would generally not occur with the Special Liquidity Facility as borrowing will not be viewed as an indication of underlying problems.
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Eric Richard • General Counsel • (202) 218-7796 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 218-7769 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 218-7795 • jbloch@cuna.com Michelle Profit • Assistant General Counsel • (202) 218-7766 • mprofit@cuna.com |
QUESTIONS TO CONSIDER
- Is the proposed rate for borrowings from the Special Liquidity Facility fair? If not, at what level should it be
set?
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- The Fed says the higher rate will be sufficient to discourage borrowers except when the market is under stress
and therefore it is not necessary to require institutions to exhaust alternative sources of credit first. Do you agree
with this analysis? Do you think the Fed could reduce the rate and allow institutions to use the Facility for loans
even if other forms of credit were also available?
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- Should the requirement that credit unions have 6% capital be part of the proposal? Should a credit union
with, for example, 5.5% capital be allowed to borrow from the Facility?
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- Is it good policy to require credit unions to have 6% capital when NCUA’s prompt corrective action has not
taken effect yet?
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Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240; e-mail them to Mary Dunn at mdunn@cuna.com or mail them to CUNA’s Regulatory Advocacy Department, Suite 300, 805 15th Street, NW, Washington, DC 20005. Thank you!!
