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Opinion

A cooperative solution to stop liquidity problems before they start

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The COVID-19 emergency represents a dual challenge. First and most immediately, we must flatten the curve to slow the virus’s spread. Second, we must move swiftly and wisely to mitigate the pandemic’s impact on the job market, access to capital and economic growth.

NCUA Chairman Rodney Hood
NCUA Chairman Rodney Hood

Meeting that challenge demands cooperative action at all levels. In its role as regulator, the National Credit Union Administration has responded decisively to the needs of the federally insured credit unions we oversee. Our top priority, after ensuring the safety and well-being of our agency’s workforce, is to ensure that the nation’s credit unions can continue to respond to the financial needs of their members in this difficult and uncertain environment.

One way we’re doing this is through the Central Liquidity Facility, a mixed-ownership government corporation that exists within the NCUA and serves as a liquidity lender to credit unions experiencing unusual or unexpected liquidity shortfalls. The Coronavirus Aid Relief and Economic Security Act, signed into law last month by President Trump, grants the NCUA Board authority to expand access to and increase the borrowing authority for the CLF.

Think of it as a form of “liquidity insurance” that can help to mitigate liquidity risk in the event of a system-wide crisis. The CLF’s borrowing power was essential in helping the credit union system work through the last financial crisis.

In the current emergency, we all hope for the best outcome. However, we must prepare for the possibility of market liquidity constraints. In that instance, the CLF would once again prove vital in addressing the liquidity needs for credit unions and the National Credit Union Share Insurance Fund. Should that challenge arise, here’s how the NCUA is working to ensure the CLF will be prepared.

First, the CLF’s borrowing authority was increased under the CARES Act. Before the CARES Act was signed into law, the Federal Credit Union Act limited this borrowing authority to 12 times the subscribed capital stock and surplus of the CLF (that is, the sum of its retained earnings and capital stock). The CARES Act temporarily increases that multiplier to 16 times. Because credit unions must only contribute one-half of their capital stock subscription amount to the CLF, every dollar of capital stock on the CLF’s books equates to $32 of additional borrowing authority.

Second, the law makes agent membership more affordable for corporate credit unions and supports the liquidity needs of the credit union system by temporarily relaxing requirements on agent membership, and no longer requiring agent members to buy capital stock for all of their member institutions.

Finally, the law temporarily allows the CLF to meet the liquidity needs of corporate credit unions and provides more flexibility for the CLF in granting loans. More detailed guidance related to the recent CLF enhancements is available on the NCUA’s website.

Additionally, the NCUA Board enacted additional regulatory changes to improve the CLF’s flexibility, including the elimination of the six-month waiting period for a new CLF member to receive a loan. The Board also eased the collateral requirements for certain asset types to provide more borrowing flexibility. This flexibility will help encourage greater numbers of eligible credit unions to join the CLF, further fortifying the CLF’s borrowing power.

Liquidity, like capital, is a pillar of strength upon which the safety and soundness of the credit union system rest. I am appreciative that Congressional leaders accepted my recommendation to enhance the CLF for the credit union system. The CLF is a proven solution for individual credit unions and for helping to stabilize liquidity throughout the credit union system, which is why the NCUA is encouraging credit unions that haven’t yet joined the CLF to take that step as soon as possible.

CLF membership is entirely voluntary. But there is strength in numbers, and by working together in the cooperative spirit in which our industry was founded and by bringing more credit unions into the CLF fold, we will bolster the system’s potential access to liquidity in the event that it should be needed.

While I believe the credit union community will remain safe and sound, it is difficult to predict how this crisis will unfold. These CLF measures will help ensure sufficient liquidity is available until we have a clearer picture of the economic impact of the COVID-19 crisis. By working together in the cooperative spirit on which the industry was founded, the credit union community can assist one another in ensuring the system has adequate liquidity – and thus maintain the health of the credit union system as we prepare for the economic recovery to come.

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