A temporary Federal Reserve program is quietly providing a cushion to corporate credit unions as they attempt to raise capital from members to meet NCUA regulatory requirements.
The excess balance account program allows corporates to offload overnight balances onto the Fed’s balance sheet while still earning the same interest rate as overnight accounts. The Fed launched the program in July 2009 because it found some institutions preferred to hold excess balances at the Fed rather than selling them in the federal funds market. However, the large balances inflated correspondents’ assets during a time when they were struggling to maintain capital ratios.
Mark Brown, chief financial officer at the $1.5 billion First Carolina Corporate Credit Union, said his Greensboro, N.C., institution was among the first corporates to get approved by the Fed to participate in EBA.
“It’s been wildly successful for us,” Brown said. Currently, First Carolina manages $750 million worth of deposits in the EBA program.
Before the Fed introduced the program, First Carolina was looking for ways to require fewer capital contributions from its 185 members and began inquiring with private institutions to see if they could take money off its balance sheet.
The EBA program has had an exponential effect on the $1.9 billion Alloya Federal Credit Union’s balance sheet. According to the Warrenville, Ill.-based corporate’s March financial reports, Alloya reduced its assets from $10.5 billion as of March 31, 2011, partly as a result of EBA. As of March 31, Alloya had $4.1 billion in EBA, more than twice the amount of assets kept on its balance sheet.
“What it did was allow us to require less capital from member credit unions,” said Vic Vrigian, vice president of marketing.
Alloya is also utilizing its subsidiary, Balance Sheet Solutions, to implement other ways to move funds off the balance sheet.
“But from the standpoint of the Fed, they already have the program in place, and from a credit risk standpoint, they are the lowest credit risk option out there,” Vrigian said.
The Fed will “evaluate the continuing need for excess balance accounts” as market conditions evolve, the central banking entity said on its website.
Brown said if EBA funds were quickly returned to First Carolina’s balance sheet, the corporate would still meet NCUA capital requirements. Of the $750 million in the EBA program, approximately one-third is from non-capitalized members. So, First Carolina would only be required to hold the capitalized members’ deposits on its balance sheet, and its current 5.51% leverage ratio would be sufficient.
Vrigian said Alloya’s business plan doesn’t ask members for capital based on their asset size; instead, it’s how a member credit union utilizes Alloya’s balance sheet that determines its capital requirement. “If members wanted to keep higher balances with us, they could do that, but we would need more capital,” he said.
As of March 31, Alloya’s capital ratio was 5.82%.
Typically, a corporate programs its core payment processing system to sweep balances in excess of an established threshold into the EBA account at the end of each business day. Excess balances are generally returned to the member credit union’s account near the beginning of the following business day.
Brown said that First Carolina simplified the process for staff and members, so that only the top 15 credit union overnight balance holders have the same amount of excess funds in the program each day.
“We didn’t want to deal with nickels and dimes,” he said.
Vrigian said Alloya’s core system sweeps all excess funds for participating members into the account at the close of each business day, so amounts vary daily.
Before a corporate can participate in the program, it must first gain the approval of both the Fed and the NCUA.
“At a minimum, an EBA program requires the establishment of participant/agent agreements, the development of related policies and procedures for the participant and agent, a system of internal review, a process continuity plan, and a plan for record retention,” the NCUA said in a July 2011 letter to credit unions on the topic.
Brown said First Carolina passed required NCUA stress tests in which the funds were returned to its balance sheet, and the regulator also approved the corporate’s EBA back up plan, policies and procedures.
Jeff Merry, senior vice president and chief financial officer for the $1.6 billion Volunteer Corporate Credit Union, said VolCorp has received approval from both the NCUA and the Fed to participate in the program, but so far hasn’t pulled the EBA trigger. Instead, VolCorp has been using SimpliCD and other off-balance strategies to reduce asset size.
“We’ve taken the approach of business as usual, given that we know the program is considered temporary, and we didn’t want to handcuff ourselves to it,” Merry said. “I look at it as an insurance policy, or an extra tool in our toolbox. If we had a big inflow of cash that diluted our capital below 5%, we would use it.”