NAFCU’s Comments to NCUA on Maintaining Access to Emergency Liquidity

February 21, 2012

Mary Rupp

Secretary of the Board

National Credit Union Administration

1775 Duke Street

Alexandria, VA 22314-3428

         RE:         ANPR on Maintaining Access to Emergency Liquidity
Dear Ms. Rupp:

            On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions (FCUs), I am writing to you regarding the National Credit Union Administration’s (NCUA) Advance Notice of Proposed Rulemaking (ANPR) on maintaining access to emergency liquidity.

            The ANPR addresses a very important issue for the credit unions industry – the ability of credit unions to have access to liquidity in times of financial emergency and distressed economic circumstances.  In late 2008 and much of 2009, this issue came at the forefront as many credit unions explored as many options as possible to ensure that they have backup access to liquidity. As a general matter, NAFCU does not support the contemplated regulatory requirement.  Without a doubt, FICUs should ensure that they have adequate sources of liquidity they should turn to in cases of emergency.  However, imposing a regulatory requirement is not the appropriate approach. 

            From the beginning of the liquidity crisis, NAFCU worked hard to ensure that credit unions’ access to available liquidity sources remains intact and that credit unions have as much information as possible about emergency sources of liquidity.  For example, we strongly and successfully advocated for the temporary increase of the Central Liquidity Facility (CLF) borrowing authority.  NAFCU believes that it is important that a viable and dependable CLF exists to offer credit unions an alternative to obtain liquidity when necessary.  NAFCU has always supported low-cost means of providing meeting credit unions’ liquidly needs.

            To address a potential liquidity crisis, the NCUA’s ANPR contemplates a regulation that would require federally-insured credit unions (FICU) to have access to backup sources of liquidity.  A FICU would be able to meet this requirement in one of four ways: (1) becoming a member in good standing of CLF directly; (2) becoming a member in good standing of CLF through a corporate credit union; (3) obtaining and maintaining demonstrated access to the Discount Window; or (4) maintaining a certain percentage of assets in highly liquid Treasury securities.

General Comments

Notwithstanding our opposition to a regulatory regime that NCUA is contemplating, we believe the agency has unnecessarily restricted to four the number of sources that would meet the regulatory requirement, two of which are directly tied to the CLF thereby increasing concentration risk within the industry  As discussed further below, should NCUA move forward with the rulemaking and seek to adopt regulations that confine credit unions’ choices, we strongly believe the following two options should be included:  (1) membership to one of the Federal Home Loan Banks (FHLBs); and (2) maintaining a percentage of highly liquid assets, not restricted to Treasuries.

FHLBs as Options

            Regrettably, the NCUA’s ANPR does not include membership to a FHLB, among the choices credit unions would have to meet the proposed requirement.  NAFCU strongly believes that this choice should be available for credit unions.  FHLB members, including many credit unions, continue to depend on their FHLB for their liquidity needs, in addition to the many other services they provide. 

            In the ANPR, the NCUA notes that 14.6 percent of FICUs report being members of a FHLB and of those, 27 percent do not hold mortgages and would not likely be able to rely on their FHLB for liquidity needs.

            While these numbers may be accurate, they do not justify the omission of FHLB membership from the list of ways to meet the backup sources of liquidity requirement.  More than one-quarter (27.2%) of FICUs do not hold or originate mortgage loans. [1] Thus, we believe the more relevant data are those that focus on FICUs that hold or originate mortgages.  Second, a more detailed examination of FICUs with $10 million or more in assets shows that a significant proportion are members of a FHLB already.  The percentage increases as the size of the portfolio is taken into account and can only be expected to increase as credit unions grow in asset size. 

            Data from FICUs’ Call Reports for the period ending on September 30, 2011 reveals that 43.4% of FICUs with $10 million or more in assets and who hold mortgage above the median for all FICUs are members of a FHLB.   The median real estate holdings for FICUs with $10 million or more in assets is $9.7 million.  Analysis of call report data also shows that 64.8 percent of FICUs with $10 million or more in assets hold or have originated at least $5 million in real estate loans.  Of these, 34.8 percent are members of a FHLB, a 2.6 percent increase from 2009. 

            In sum, while they are not lenders of last resort, FHLBs are a vital source of liquidity.  And, the fact that a large proportion of FICUs that hold mortgages are members of a FHLB, along with the notable increase in credit union FHLB membership in recent years, should, without question, lend to the conclusion that NCUA’s contemplated regulation includes FHLB membership as an option to meet the proposed requirement.

Liquid Assets

            In addition to FHLB membership, a credit union should be able to meet any regulatory requirement for backup liquidity sources if a certain percentage of its assets are liquid, i.e., assets that can be sold rapidly with minimal loss in value.  For example, investments with remaining maturities of one year or less should meet the liquidity standard for purposes of the proposed regulation.   The NCUA should identify assets, other than Treasury holdings, that are adequately liquid for purposes of emergencies.

Membership to the CLF

            One of the ways that a FICU can meet the proposed requirement to have access to backup sources of liquidity is to become a member of the CLF.  Under the Federal Credit Union Act (FCU Act), to become a member, a natural person credit union must subscribe to the CLF capital stock one-half of one percent of the paid-in and unimpaired capital and surplus.  12 U.S.C. § 1795(a).  A corporate credit union must subscribe one-half of one percent of “the paid-in and unimpaired capital and surplus of its member natural person credit unions, or of any credit union comprising such credit union group, and which are not regular members.”  Id.  § 1795(c).

            NAFCU believes that the standards for membership to the CLF, both in terms of the amount of capital contributions that is required, and the application process involved,  should not be as stringent and onerous as they are currently.  The fact that the standards are too stringent is evidenced, in part, by the fact that only 1.3 percent of FICUs have direct membership in the CLF.   We urge the NCUA to seek legislative changes to Title III of the FCU Act, as necessary, that would increase direct membership, including changing the method that the CLF is funded.  NAFCU stands ready and willing to assist in this undertaking.

Corporate Credit Unions

            Under the current structure, corporate credit unions can serve as agents to enable their member-natural person credit unions to have access to the CLF.  In the past two years corporate credit unions have had to, in many cases, change their business models to meet NCUA’s new regulatory standards and weather the failure of US Central Corporate Federal Credit Union.  NAFCU firmly believes corporates should be encouraged to serve as agents of the CLF, but recognizes that this may not fit into many corporates’ business plans. 

            As discussed above, direct membership to the CLF is far too stringent for some natural person credit unions and many credit unions may find it unattractive.  Accordingly, to ensure that credit unions continue to have access to the CLF, NCUA should take appropriate action within its powers to incentivize corporates to serve as agents, as recapitalizing the CFL could put stress on some balance sheets.  Further, NCUA should pursue statutory changes to ensure that the CLF remains well-funded and operates effectively for the purpose it was created.

            NAFCU appreciates the opportunity to provide comments to the NCUA on the ANPR.  Should you have any questions or would like to discuss these issues further, please contact me at or by telephone at (703) 842-2803 or Tessema Tefferi, NAFCU’s Regulatory Affairs Counsel, at or by telephone at (703) 842-2268.


Dan Berger

Executive Vice President of Government Affairs

[1] According to NCUA Call Report data, as of September 30, 2011, approximately 72.8% (5,226) of all FICUs hold or originate mortgages.

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