Abundant Deposits Curtail Liquidity Rule Urgency
When the NCUA introduced its proposed liquidity rule in July, and again during its October economic video update, the agency cited the urgency of U.S. Central Bridge FCU’s October shutter date and the 6,000 credit unions that will be unable to borrow from the Central Liquidity Facility as a result.
But when the NCUA unveiled its October board agenda, the final liquidity rule was not included.
Why? NCUA Public Affairs Specialist John Fairbanks said the regulator is still reviewing comment letters, and would write the final rule after the review process is complete.
Those letters include plenty of criticism about the necessity for the proposed rule, which would require credit unions with more than $100 million in assets to establish their own capitalized ownership in the CLF, or gain access to the Federal Reserve’s Discount Window, despite the industry being flush with liquidity due to low loan demand.
NAFCU General Counsel Carrie Hunt said she’s not surprised the final rule won’t be addressed by the NCUA Board at its meeting on Thursday.
“Most credit unions, at least the larger ones, already have emergency liquidity plans in place,” Hunt said.
Credit unions can already access the Fed’s discount window and also use corporates to manage liquidity, she added, so “these things are already in place regardless of a formal mandate.”
In CUNA’s comment letter, Deputy General Counsel Mary Dunn said interagency guidance on liquidity policies, plans, and procedures that took effect in May 2010 sufficiently addresses liquidity risk management.
Dunn called the proposed rule redundant and noted that the other regulators included in the 2010 guidance “to our knowledge, have not found the need to issue regulations on emergency liquidity.”
Economist Brian Turner of Catalyst Corporate FCU in Plano, Texas, said Tuesday the current pace of inflation – 2.0% over the past 12 months – is within the Federal Reserve’s target range, which makes it unlikely for the central bank to raise short-term rates before its previously stated mid-2015 target date.
“Credit unions will continue to experience moderate loan demand in the 4% range while share growth remains on a 10% pace,” he said. “This will continue to generate positive operating cash flow and keep credit unions flush with liquidity through the end of next year.”
Turner said although the NCUA hasn’t said so in writing, field examiners “have not been shy” in telling credit unions corporate or federal home loan banks won’t be considered acceptable emergency liquidity sources under the proposed rule, and Fed access may be limited for those that don’t have an existing relationship.
As a result, Turner said, the CLF is “virtually the only acceptable viable alternative for contingency planning purposes, yet (the NCUA) falls just short of making a regulatory requirement.”
Few corporates are planning to serve as a CLF agent, he added, which means credit unions will be forced to becoming direct members.
The NCUA has said federal home loan banks are not appropriate emergency liquidity providers because they would be affected by systemic liquidity problems. However, Hunt said NAFCU has not seen any evidence, contrary to NCUA claims, that the banks did not lend during the last liquidity crisis.