The Federal Home Loan Banks want to be included in the NCUA'spending final emergency liquidity rule, according to a Jan. 31letter to NCUA Board Chairman Debbie Matz and Board Member MichaelFryzel signed by the 12 FHLB presidents.

The proposed rule requires credit unions with more than $100million in assets to establish emergency liquidity relationshipswith one of two providers, the NCUA's Central Liquidity Facility or the Federal Reserve's discountwindow.

The FHLB system “has demonstrated time and again that it can andwill provide liquidity to its member institutions even in times offinancial emergency and distressed economic circumstances,” thebank presidents wrote in a Jan. 31 letter, which was also deliveredto NCUA Executive Director Mark Treichel and Director ofExamination and Insurance Larry Fazio. 

The banks “played a leading role, beginning in 2007, inproviding liquidity to their member financial institutions. Duringthe fiscal crisis that began that year, the FHLBs reliablysupported their credit union members,” the letter said,specifically citing liquidity provided to Members United CorporateFCU and U.S. Central FCU during that time period.

John von Seggern, president/CEO of the Council of Federal HomeLoan Banks, said the letter was prompted by the system's 900 creditunion members.

“They are encouraging us to make sure we are active in thisprocess,” von Seggern said. “The NCUA is going through the rulesprocess and we want to make them understand we will, have and canprovide the liquidity our members need.”

The NCUA said last July 24 when it introduced the proposed rulethat while the FHLBs are a good source of regular liquidity, theyaren't appropriate emergency liquidity providers.

“FHLB is certainly one way a credit union can diversify toguarantee a smooth flow of funding for ordinary operations,” theNCUA said in its board memorandum. “The board recognizes, however,that the FHLBs are private institutions which are not obligated,and may not be able, to meet emergency liquidity demands in thesame way the discount window and CLF are statutorily designed todo.”

Von Seggern said he strongly disagrees with the NCUA.

“We access the markets, including global markets, and increasedlending by $400 billion in 2008,” he said. “We did not have aliquidity problem. The entire market was tough, granted, but youcan't go from lending $700 billion to over $1 trillion withliquidity problems. The Treasury wouldn't allow that.”

CUNA Chief Economist Bill Hampel said because failed collateralwas an issue during the last liquidity crisis, CUNA has discussedwith the NCUA the potential to require credit unions that use anFHLB as a source of emergency liquidity to keep more than adequatecapital, so that after a substantial haircut, the FHLB would not berestricted on its lending.

During the liquidity crunch, corporate credit unions struggledto provide collateral for borrowings because of the reduced valueof their collateral, mortgage-backed securities. 

Von Seggern echoes what the FHLB presidents said in theirletter–that regulations state they can make advances to memberswithout positive tangible capital if the member's insurer requeststhe advance in writing and the FHLB transmits that request to theFHFA.

“What we're trying to demonstrate is how willing we are to workwith [credit unions] and serve their needs,” he said. “If the NCUAwould ask us to lend to a credit union that lacked collateral, wewill lend. And, if they suggest we not lend to a credit union, wewill defer to the regulator.”

CUNA Deputy General Counsel Mary Dunn said Feb. 4 during a presscall that its questionable the NCUA Board will change its finalemergency liquidity rule to include Federal Home LoanBanks. 

NCUA Public Affairs Specialist John Fairbanks said the NCUA isreviewing all comments regarding the proposed rule and added thatstaff members plan to present options and recommendations to theNCUA Board sometime this year. He would not say if the NCUA wasconsidering adding FHLBs to the final rule.

Von Seggern said his organization has met with the NCUA todiscuss the rule. When asked if he thinks the regulator is open tomodifying the rule to include FHLBs, he said the two sides areattempting to work through the issues. 

 “We just want to make sure there is a goodunderstanding because it appears there is not a full understandingbetween us and them,” he said. “By sending letter with all 12presidents signing, I think it showed them that we are there, wewant to work with our members and their regulator and make surethey can get access to liquidity when they need it.”

He added that the council is not opposed to the NCUA's CentralLiquidity Facility but rather just wants to be included in the ruleas an option.