Executives from the Federal Home Loan Bank of Atlanta areworking with the NCUA to draft a Memorandum of Understanding thatwould define the banks' role in providing liquidity to creditunions, including troubled institutions.

That doesn't mean the NCUA will add the banks to its finalemergency liquidity rule, but it is another sign the regulator is reconsidering its position thatFHLBs aren't appropriate providers of emergency liquidity.

During the liquidity crunch, corporate credit unions struggledto provide collateral for much-needed borrowings because of thereduced value of their pledged assets, mortgage-backedsecurities.

Federal Home Loan Banks require collateral to lend, which couldpose a problem in a time of systemic crisis. The Jan. 31 letterfrom the 12 FHLB presidents to the NCUA Board said the banks wouldsupport requiring stress testing and other contingency planning forcredit unions planning to utilize the banks for emergency liquidityas an alternative to the CLF and Fed Discount Window.

The requirement would “ensure that such credit unions haveentered into the necessary agreements and possess the appropriateamount of eligible collateral to meet their liquidity needs in avariety of stress scenarios,” the presidents wrote.

However, the letter continued that the banks are working withthe NCUA to draft a memorandum of understanding regarding thebanks' role in providing liquidity to credit unions, including intimes of stress.

“We believe that such a memorandum will help ensure that creditunions have regular and emergency access to liquidity, as well asto ensure that resolutions of troubled FHLBank members are carriedout in a manner that meets the goals of both the NCUA and theFHLBanks,” the letter said.

The MOU would “establish a framework for dealing with insolventand financially troubled institutions” even in times of systemiccrisis. The letter identified Director of Government Relations EricMondres and General Counsel Reggie O'Shields from the Federal Home Loan Bank of Atlanta as those who would be workingwith NCUA staff on finalizing the MOU.

CUNA Deputy Counsel Mary Dunn said during a Monday press callthat because credit unions feel so strongly that the banks shouldbe an emergency funding option and have made their feelings knownto the NCUA, the agency “doesn't want to totally dismiss out ofhand using Federal Home Loan Banks.”

Dunn said she thinks the issue could be worked out with theMOU.

“The NCUA is taking a look at that,” she said. “Whether theywill allow it, though, is questionable at this point.”