LENEXA, Kan. -- U.S. Central will nearly double its liquidity resources May 22, when the wholesale corporate gains access to the Federal Reserve Bank's intraday and discount window credit lines.
According to David Dickens, executive vice president of asset-liability management, the Fed lines add as much as $15 billion to U.S. Central's existing $20 billion in market-based liquidity sources.
The move is 18 months in the making, after corporates warned U.S. Central that the increasing popularity of electronic payments, combined with the Fed's posting rules, were making early morning funding and intraday liquidity management increasingly difficult.
As the percentage of electronic payments continues to rise, the problem will only get worse, Dickens said, so U.S. Central agreed to spearhead an effort to research the hows and whys of the problem, as well as propose a solution.
Research revealed that on most days, a corporate's 11 a.m. net debit posting is significantly larger than that morning's 8 a.m. net credit posting. Add in an unexpected event, like a third-party encoding error, and corporates can teeter on the edge of daylight overdraft (DOD). A few corporates fell into the red with the Fed, which is unforgiving of DODs, even for just a minute.
Not only does the Fed place corporate offenders on a real-time monitoring system and sometimes require collateral, the bank also informs the NCUA, which turns up its own oversight a notch.
Jim Hansen, president and CEO of $1.8 billion VACORP, said he was one of the first corporate members to sound the alarm regarding morning funding and intraday management troubles a few years ago.
Hansen said his corporate experienced a debit error back in the early days of electronic payments, when a $99 million debit was erroneously drawn from his payments account, because the routing number was read as the item amount by the data-capture system. He hasn't had any problems since, but recalled how serious the situation was, saying before he could research how or why it happened, he had to put the account back in the black.
"We are now able to do two things," Dickens said of the new Fed accounts. "We're allowed provide intraday liquidity so member corporates can avoid a DOD, and in an extremely dire economic situation, we'd have access to overnight credit, as well."
In order to gain access to the funds, U.S. Central had to waive its banker's bank exemption, and post Regulation D--so-called sterile--reserves with the Fed like other institutions. Dickens said the move doesn't change U.S. Central's status as a wholesale corporate; in fact, he added, most wholesale banks have already posted reserves to tap the additional liquidity.
Though U.S. Central gained access to the credit lines primarily to ease intraday pressures on corporates, the discount window option helps the Fed achieve its goal of providing significant amounts of liquidity for capital markets, especially after the hit fixed-income markets have taken over the past nine months, Dickens said.
"As everybody knows, today you can't have enough liquidity. Nothing happens quickly with these kinds of projects, so it was fortunate [U.S. Central] was already working on it," Hansen said.