The Central Liquidity Facility purpose requires full authority

"To improve the general financial stability by meeting the liquidity needs of credit unions." It's a simple purpose and it has been the operating cornerstone of the Central Liquidity Facility (CLF) since its formulation in 1978. Capitalized by its shareholders and cooperatively administered by NCUA and the corporate credit union network, the CLF stands ready to provide needed liquidity to credit unions for short-term, seasonal and protracted emergency liquidity needs. As a special industry lender, the CLF is concerned only with credit unions' liquidity needs. The CLF cannot lend to a credit union for the purpose of expanding a credit union's portfolio. Moreover, corporate credit unions can't access the CLF - they serve administrative and delivery system functions, deriving no benefit from credit unions' use of the funds. In the past, the CLF has effectively provided emergency liquidity to credit unions. An example? In 1982, the Comptroller of the Currency closed the Penn Square Bank, an institution in Oklahoma with over $500 million in assets. One hundred thirty-nine federally-insured credit unions had uninsured deposits of $111.4 million in Penn Square. Financial regulators determined that 22% of the uninsured deposits ($22.3 million) should be written off as having no value and the FDIC issued receiver's certificates on the remaining uninsured balances. Credit unions carried these certificates as non-earning assets on their books. The impact of the non-earning assets coupled with the possibility of further devaluation prompted several corporates to request advances from the CLF on behalf of their members. Within weeks, 29 advances totaling $29 million were disbursed from the CLF. The funds were used to provide credit union managers an opportunity to restructure their shares to absorb the loss without panic, fear or loss of member confidence in the credit union system. The failure of Penn Square was highly publicized and the list of uninsured depositors was widely published. There was an urgent need to maintain the confidence in the credit union system and more particularly, in those credit unions reporting large losses in relation to capital. The CLF loans were a crucial part of the system that kept any crisis of confidence from occurring. Credit union boards and staff seldom talk about the CLF or how it functions. So why bring it up now? The CLF's lending activities are funded by its capital and by borrowing from outside sources. The Federal Credit Union Act imposes a limit on the CLF's borrowing authority - 12 times the CLF's subscribed stock and retained earnings which equates to approximately $21 billion. In 1981, Congress imposed a $600 million cap on the CLF's new borrowing for loans to credit unions. Each year, NCUA testifies before the House Appropriations Subcommittee on VA-HUD and Independent Agencies (Subcommittee) to request appropriations for the CLF. Last year, NCUA asked the Subcommittee to omit the CLF's borrowing cap from the appropriations bill in order to allow the CLF to fill its role as a backup liquidity provider to credit unions in the event of extraordinary liquidity demands during Y2K. As a result, in May 1999, President Clinton signed into law an emergency appropriations bill which contains a provision that lifts the CLF's borrowing cap from $600 million to its full $21 billion statutory authority. NCUA recently testified before the Subcommittee regarding fiscal year 2001 appropriations. NCUA has again requested the Subcommittee to omit the CLF's borrowing cap from the appropriations bill to allow the CLF to borrow up to its full statutory authority. A consensus appears to have formed in Congress regarding the CLF. It enjoys broad bi-partisan support for continuation as a source of backup liquidity. The Treasury Department's well-articulated opposition to the CLF in its 1997 Study on Credit Unions has found few if any adherents. And yet there is an equally clear Congressional curiosity about the CLF, manifested by the House Banking Committee leadership's March 9 request that the General Accounting Office (GAO) conduct a six-week study of the CLF, its year-end borrowing activities, and its general operations. Congress gives no indications of passivity when it comes to guaranteeing the safety and soundness of financial institutions, even ones as well-regarded as credit unions. That explains why the Subcommittee adopted a "wait-and-see" attitude regarding the proper level of borrowing authority for the CLF, pending the results of the GAO study. So why lift the CLF's borrowing cap to the full statutory authority? No value can be placed on the confidence generated in a system that has its own liquidity backstop. That certainly was true for Y2K. While massive Y2K-related withdrawals did not materialize, the knowledge that the CLF was available as a backstop was an important factor in lessening actual liquidity demand during the Y2K event. Moreover, the CLF did actively lend during the last quarter of 1999. In response to credit union liquidity needs, the CLF, through the corporate credit union network, made a total of 157 short-term, mostly overnight loans totaling $666.2 million. In other words, the CLF worked during Y2K. Y2K, however, was a well-anticipated event. The credit union system knew Y2K was coming and it was prepared. Credit unions set aside extra cash to fund their ATMs and other cash withdrawals. Corporate credit unions anticipated and met larger liquidity demands from their members. In fact, the proportion of assets in net loans at corporates went up by a factor of ten from December 1998 ($126,587,563) to December 1999 ($1,278,623,066). What happens, however, when the system is not prepared? As stated in NCUA's testimony before the appropriations subcommittee a few weeks ago: "The imposition of an inadequate borrowing cap on the CLF could prevent it from fulfilling its statutory mission to promote credit union stability by providing liquidity and could potentially destabilize member confidence during an abrupt, unanticipated emergency situation." Here's an example: Suppose a credit union's members, concerned about their employer's merger with another company, decide to pull funds out of the credit union. Using their PCs, members can move money instantaneously at any time of the day. The credit union has precious little time to act and may be in danger of restricting withdrawals or close its doors without the ability to move quickly to obtain needed liquidity. The CLF must have its full statutory borrowing authority to meet this and other liquidity needs. This is particularly true given the 7/12 fold increase in federally-insured credit unions assets (from $54.9 million to $411.4 billion as of year-end 1999) since imposition of the 1981 borrowing cap. The CLF serves an integral function within the credit union system. It is meant to be a lender of unfailing reliability when credit unions need liquidity. A $600 million borrowing cap is simply not sufficient to assure that the CLF can carry out its statutory purpose. As Congress assesses the appropriate borrowing cap for the CLF, it need look no further than the formula originally enunciated in the Federal Credit Union Act when the CLF was established.