Liquidity Regs Battle Lines Are Drawn
Are your credit union’s pockets deep enough to satisfy the NCUA?
That question has now bubbled to the surface as the federal regulator circulates an advanced notice of proposed rulemaking that seeks to detail liquidity requirements for federally insured institutions. The draft ANPR said the purpose was “to require federally insured credit unions to have access to backup federal liquidity sources for use in times of financial emergency and distressed economic circumstances.”
Many inside the credit union industry said they loudly oppose the NCUA’s attempt to draw a road map for liquidity.
“Some believe that they are being forced to put money where they don’t want to,” said a consultant to large credit unions who requested anonymity because he was not authorized to speak for his clients. “They believe the NCUA is forcing them to either join a corporate credit union or to buy Central Liquidity Facility stock, and they don’t want to do either.”
The CEO of a corporate credit union added, “The proposal is a backdoor way for NCUA to force investment in the CLF, which is a source of its power.”
Fred Becker, NAFCU CEO, agreed that there is discontent among some in the industry.
“Some credit unions feel they are being forced into the CLF. There are other routes to liquidity,” he said.
But do not think it is all opposition to the NCUA. Some credit union leaders believe the agency is doing what it needs to be doing.
“It seems ludicrous to be pushing liquidity at this moment,” said Lee Butke, CEO of Columbus, Ohio-based Corporate One. “But let’s not forget that, for many credit unions, liquidity was unattainable just a few years ago. What the agency is proposing makes sense.”
The CLF, a little understood body owned in part by credit unions with assets over $2 billion, is unquestionably at the center of the NCUA’s liquidity push.
That is because the regulator, in its ANPR, proposed four ways credit unions could demonstrate liquidity: buy CLF stock; indirectly fund CLF by joining a corporate that owns CLF stock; obtain “demonstrated access” to the Federal Reserve Bank’s discount window (where borrowers need to show solid collateral); or by holding Treasuries.
The options may be clear, but the industry’s ability to comply is less clear.
The NCUA , in its ANPR draft, painted a bleak picture of a highly illiquid credit union industry. “Based on June 30, 2011, Call Report data, most FICUs have no emergency liquidity source beyond indirect CLF membership by virtue of being a member of a corporate and USC Bridge holding the CLF capital stock. Only 1.3% of FICUs have direct membership in CLF, and only 4.5% of FICUs are set up to access the Federal Reserve discount window.”
The NCUA summed up what it saw as a troubling state of affairs. “For these reasons, the board believes it is important to explore avenues for preserving credit unions’ access to the CLF when USC Bridge can no longer serve as the primary agent, credit unions choose providers other than agent corporates of correspondent services or continuing corporates do not take up CLF capital stock subscriptions on behalf of their members.”
The bottom line, explained industry consultants, is that not very many credit unions could qualify for the Fed’s discount window. Not many more would be enthused about buying Treasuries, which currently pay very low interest rates.
That leaves the CLF, and yet, at least in the minds of some experts, CLF should be wound down not built up. “It should be euthanized,” said Marvin Umholtz, a credit union industry consultant who explained that the CLF, although well-intentioned, no longer served the broad liquidity needs of today’s credit union community. He added, “Federal government liquidity backstops are needed only in an emergency like the 2008-2009 financial system dislocation. Those don't happen that often, and is it worth the cost to pay now for something that might not happen for decades, if ever again? Requiring all credit unions to have such federal government liquidity access is a refutable assertion.”
Strike CLF from the list and what’s left? Not much, which is why the arguments are likely to dial up in volume.
At the NCUA, Public Affairs Specialist John Zimmerman said, “We are very much looking forward to comments.”
Zimmerman added, “In a financial emergency or crisis, federal sources of liquidity are typically the only reliable sources, hence the ANPR on asking for comments that we very much look forward to reviewing on ensuring that access through the sources listed.”
Exactly what will come of the NCUA’s ANPR is unknown at this point but some see good coming of it regardless of what transpires. “Credit unions need to learn the lessons of the past,” said Butke. “We need many lines of credit. We need to be ready for abnormalities. It’s in those times when we may need to draw on sources of liquidity but it is also in those times when those sources are most likely to vanish.”