Can NCUA's updated liquidity tool compete with the Fed?
The National Credit Union Administration is crossing its fingers that revitalizing and updating a decades-old, rarely used liquidity tool can help credit unions better manage the economic fallout from the coronavirus.
New measures from Congress and the regulator itself are intended to spur use of the agency’s Central Liquidity Facility, a mechanism created in 1979 as a government-sponsored enterprise similar to Fannie Mae and Freddie Mac. Managed by the NCUA board, the CLF was born out of a need for increased liquidity, and it mimics how the Federal Reserve discount window met the needs of banks at the time it was created.
But the CLF is rarely used, and even some credit unions that do subscribe to it suggest that it’s primarily only intended as a last resort.
“Looking at the Fed discount window, it just seemed that we had access to the funds immediately,” said Sara Deeter, vice president of finance and accounting at United Federal Credit Union in St. Joseph, Mich. “There were no limitations in terms of the size of the borrowing as long as you had collateral there whereas with the CLF, you’re limited to the stock level of the CLF.”
United Federal Credit Union is not a member of the CLF and is not considering joining at this time. But that viewpoint is the type of attitude NCUA is hoping to change. That could prove a challenge, however, given the number of other, more widely used liquidity sources.
Before the recent changes to the CLF, many credit unions thought of the facility as a dinosaur – if they thought of it at all. And it’s possible that a fair chunk of credit unions didn’t know about its existence until recently. As with the Fed’s Discount Window, membership in the CLF is anonymous, but NCUA’s 2019 annual report shows that only about 5% of total active institutions were members at the end of last year. By comparison, data from Callahan & Associates shows only about 27% of the industry were members of a Federal Home Loan Bank at the end of 2019.
Credit unions already have access to various liquidity sources and the movement is generally considered well-capitalized. The industry’s overall loan-to-share ratio stood at 84% at the end of 2019, according to NCUA, and a 2013 rule mandated that all federally insured credit unions with assets over $250 million have access to a backup source of federal liquidity for emergencies. Based on Q4 2019 data from the regulator, it’s safe to estimate that at least 80% of total system assets are held by CUs above the $250 million-asset mark.
Tim Bruculere, senior vice president of Alloya Corporate Federal Credit Union, suggested small and midsize CUs might be more likely to use the CLF, “whereas it’s more likely that large credit unions will join the Fed.”
As far back as 2012, in the wake of the corporate credit union crisis and the Great Recession, some in the industry were calling for reforms to the program, but plenty of questions about its validity remain today.
“It’s not fulfilling any meaningful role for the industry,” said Chip Filson, a former president of the CLF and director of office programs at NCUA. “The whole concept of the CLF is that it’s a firefighter. It’s a fire station and because you don’t have a fire, I think there’s been periods of time in which NCUA itself has actively believed that it didn't need the CLF and therefore has not looked for ways to expand and make it an integral part of the credit union system.”
Can corporates widen CLF’s reach?
Aside from the lack of a need for excess liquidity in recent years, one factor hampering the CLF was that it was seen as difficult to tap into. Recent measures have attempted to change that perception. NCUA last week issued an interim rule eliminating the six-month waiting period for new members to receive loans, along with temporarily amending the waiting period for CUs to terminate membership and easing collateral requirements on certain assets. The coronavirus relief bill signed by President Trump also included provisions aimed at encouraging more CUs to join, including opening membership up to corporate credit unions.
The move to allow corporate credit unions to join the CLF is important since many corporates provide services to medium and smaller-sized credit unions and can expand access to the CLF system.
“I think the biggest part of the CARES Act is opening it up to more credit unions by allowing corporates to put up that capital for a subset of members,” said Alloya’s Bruculere. “That increases the ability for the system to have more access to liquidity to help people.”
Until recently, corporates could only join the facility as agent members, not as regular members. But there are concerns that even these institutions’ excess liquidity needs are already being met by other outlets.
Melissa Ashley, CEO of Corporate One FCU, noted that her organization already has access to the Federal Reserve’s discount window and the FHLB, along with various lines of credit from banks and other corporate CUs.
Some features of the CLF – such as the recently lifted six-month waiting period for new members to get loans – may have contributed to itsbeing a last resort for credit unions.
“Some of the provisions in the CLF may not be as attractive in putting capital in and getting that back,” said Jay Murray, chairman of the Corporate Alliance, a consortium of corporate CUs. Moving and posting collateral can “be a little bit more cumbersome through the CLF because it’s just not as an active liquidity provider as the Fed would be,” he continued.
Some aspects of the CLF’s structure could be more appealing to credit unions than other liquidity options. The Fed’s discount window generally requires advances to be repaid overnight, whereas the CLF has a longer-term requirement of 90 days of when an advance needs to be repaid. On the other hand, Discount Window members can get same-day availability while it can take up to a week to access funds at the CLF. The Fed also requires institutions to post collateral in advance, whereas the CLF only requires collateral before CUs take an advance.
“We have something here that can help be a major liquidity backstop to our credit union movement,” Murray said. “We should do what we can to utilize those funds and because it is a legislative part of the national budget, we should solve for our own problems.”
Liquidity crisis ahead?
The recent legislative and regulatory changes to the CLF all sunset at the end of this year, but some NCUA officials have indicated those modifications may need to be extended to the end of 2021, citing concerns that a real liquidity crisis might not kick in until next year.
Recent changes, board member Todd Harper said during the agency’s April meeting, are “helpful but may be too short in length, because liquidity needs seem likely to hit their highest point next year.”
While board member Mark McWatters did not echo Harper’s concerns surrounding the timing of a crisis, he said, “I am concerned credit unions may experience liquidity and capital shortfalls” as members utilize loan forbearance options and suffer job losses that make them unable to repay loans.
“It is all but impossible to predict with certainty the economic consequences that may follow closures, job losses" and other fallout from the pandemic, he said. “It is important that we continue to thoughtfully and thoroughly monitor the capital and liquidity needs of the credit union community.” He added, “Without appearing needlessly alarmist, we must continue to develop an array of approaches" to tackle the coming crisis. "In my view, this should serve as the agency’s top priority.”
Harper and McWatters both called on Congress to make changes to the CLF permanent.
In a subsequent interview, NCUA Chairman Rodney Hood stopped short of saying a liquidity crisis is coming but emphasized the agency wants to be ready for anything.
“We just want to make sure that we have all the tools in our arsenal to address the liquidity needs that could come forth,” said Hood. “We’re not saying that" a liquidity crisis is going to occur, "but we’re saying that typically is where focus is needed and we want to be prepared.”
“I’d rather have the umbrella today when it’s sunny than looking for the umbrella when it begins to rain,” he added.