MOU with NCUA Could Iron Out FHLB Liquidity Wrinkles
Executives from the Federal Home Loan Bank of Atlanta are working with the NCUA to draft a Memorandum of Understanding that would define the banks’ role in providing liquidity to credit unions, including troubled institutions.
That doesn’t mean the NCUA will add the banks to its final emergency liquidity rule, but it is another sign the regulator is reconsidering its position that FHLBs aren’t appropriate providers of emergency liquidity.
During the liquidity crunch, corporate credit unions struggled to provide collateral for much-needed borrowings because of the reduced value of their pledged assets, mortgage-backed securities.
Federal Home Loan Banks require collateral to lend, which could pose a problem in a time of systemic crisis. The Jan. 31 letter from the 12 FHLB presidents to the NCUA Board said the banks would support requiring stress testing and other contingency planning for credit unions planning to utilize the banks for emergency liquidity as an alternative to the CLF and Fed Discount Window.
The requirement would “ensure that such credit unions have entered into the necessary agreements and possess the appropriate amount of eligible collateral to meet their liquidity needs in a variety of stress scenarios,” the presidents wrote.
However, the letter continued that the banks are working with the NCUA to draft a memorandum of understanding regarding the banks’ role in providing liquidity to credit unions, including in times of stress.
“We believe that such a memorandum will help ensure that credit unions have regular and emergency access to liquidity, as well as to ensure that resolutions of troubled FHLBank members are carried out in a manner that meets the goals of both the NCUA and the FHLBanks,” the letter said.
The MOU would “establish a framework for dealing with insolvent and financially troubled institutions” even in times of systemic crisis. The letter identified Director of Government Relations Eric Mondres and General Counsel Reggie O’Shields from the Federal Home Loan Bank of Atlanta as those who would be working with NCUA staff on finalizing the MOU.
CUNA Deputy Counsel Mary Dunn said during a Monday press call that because credit unions feel so strongly that the banks should be an emergency funding option and have made their feelings known to the NCUA, the agency “doesn’t want to totally dismiss out of hand using Federal Home Loan Banks.”
Dunn said she thinks the issue could be worked out with the MOU.
“The NCUA is taking a look at that,” she said. “Whether they will allow it, though, is questionable at this point.”