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WASHINGTON-NCUA and the other federal financial institution regulatory agencies issued guidance recently on the appropriate use of the Federal Reserve’s primary discount window program in liquidity risk management and contingency planning. The guidance explains the Fed’s discount window programs, including the new primary and secondary programs initiated in January. It emphasizes that adequate liquidity contingency planning is essential to safety and soundness and the discount window ensures diversification of the potential sources of funds to be used in an emergency. In employing primary credit for an emergency, financial institutions must make certain that the necessary documentation and collateral arrangements are in place; primary credit lines are periodically tested; viable take-out or exit strategies exist to replace primary credit borrowings; and appropriate cost/benefit analyses are considered. “Since primary credit can serve as a viable source of back-up, short-term funds, supervisors and examiners should view the occasional use of primary credit as appropriate and unexceptional. At the same time, however, supervisors and examiners should be cognizant of the implications that too frequent use of this source of relatively expensive funds may have for the earnings, financial condition, and overall safety and soundness of the institution,” the guidance read. “Over-reliance on primary credit borrowings, or any one source of short-term contingency funds, regardless of the relative costs, may be symptomatic of deeper operational and/or financial difficulties.”

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