CLF, Fed discount window are only sources for emergency liquidity in NCUA rule

A new rule addressing emergency liquidity and contingency funding plans for credit unions contains some important changes that improve the final rule compared to the proposal and the Credit Union National Association (CUNA) said it appreciates these revisions. However, CUNA does not agree the rule is needed at this time.

Under the final rule, which was approved at the National Credit Union Administration (NCUA) open board meeting on October 24, credit unions with less than $50 million in assets would need to maintain a basic written emergency liquidity policy, but would not be required to take further action. This threshold was raised from $10 million in the proposal. All federally insured credit unions (FICUs) with assets of $50 million or more--also up from the proposal--would be required to develop contingency funding plans describing how their credit union would address liquidity shortfalls in emergency situations.

FICUs with assets of $250 million or more would be required to have access to a backup federal liquidity source for emergency situations. That is a change from the original proposal of $100 million, and as a result, a number of credit unions that would have been required to obtain a federal source of emergency liquidity will avoid this requirement under the final rule. CUNA said this was a positive development that will benefit these credit unions. 

The rule "is part of a global regulatory effort to promote sound liquidity risk management," NCUA Chairman Debbie Matz said. "Financial institutions need to maintain ample liquidity to withstand unexpected contingency events. This rule will strengthen individual credit unions and, as a result, the entire system," she added.

The final rule does not include the Federal Home Loan Banks (FHLB) as an acceptable source of emergency liquidity, although eligible credit unions required to meet the federal source provisions would be free to borrow from a FHLBank for nonemergency purposes.

The 12 Federal Home Loan Bank presidents, in their own comment letter, urged the NCUA to add their banks to the agency's list of approved emergency liquidity providers for credit unions.

CUNA also strongly supported the use of the home loan banks for liquidity. Without the FHLB, credit unions have two options to ensure a federal liquidity source for emergency situations: Becoming a member of the NCUA's Central Liquidity Facility (CLF) by subscribing to CLF stock or access to the Federal Reserve's discount window.

CUNA applauds the NCUA's decision to raise the thresholds for different compliance responsibilities, but does not agree the rule is needed, CUNA Deputy General Counsel Mary Dunn said.

The rule becomes effective on March 31, and approximately 374 credit unions will be required to establish a new federal source of emergency liquidity.