Liquidity & Contingency Funding Plans

Liquidity & Contingency Funding Plans


LARRY FAZIO: Liquidity rule
is needed because it’s part of NCUA’s broader regulatory
reform initiative; it’s the cornerstone of all financial
institution management. And so to make sure that we
have a comprehensive regulatory environment we
added the liquidity rule to make sure that there’s a
risk management discipline in place for liquidity
planning in credit unions. OWEN COLE: One of the things
that we discovered during the financial crisis was
that the state of liquidity planning was not what it
should be. Not, not at the individual
institutional level nor at the system-wide level. So, another dimension to the
liquidity rule is the acknowledgement by our board
that reforms were needed to sure up the strength of
liquidity in the system. LARRY FAZIO: In fact, one of
the lessons we learned during the crisis is that
liquidity is vital. It’s one of those things that
tends to get taken for granted. It’s a little bit like air,
you don’t notice it until it’s not in the room, and
then you don’t have very long to live. And so we wanted to make
sure that credit unions started liquidity planning. OWEN COLE: Another aspect of the crisis which directly
affected credit unions was the the loss of US central
federal credit union and the role that it played as a
member of the central liquidity facility effectively. Their role as an agent
member was to buy membership capital stock on behalf of
all the natural person credit unions that didn’t
belong directly. And as a consequence of
their failure they ultimately terminated their
membership in CLF and that blanket liquidity coverage
that had been enjoyed by more than 6,000 credit
unions went away the day that US Central was
liquidated. And that’s something that
this rule hopes to reconstitute, the protection
that had long been in place needs to be put back in
place to some degree. LARRY FAZIO: The rule
applies to, in some sense, all federally insured credit
unions. There’s different tears of
requirements based on the size of the credit union to
take into account the complexity and the unique
needs as credit unions are larger and more complicated
and I’m going to let Owen explain a little bit about
how that tearing process works. OWEN COLE: Well as already
mentioned, the rule essentially applies to all
federally insured credit unions at some level but as
he says it’s teared in the requirements as it
progresses. For larger institutions
there’s a greater level of requirements. But for credit unions under
50 million the rule basically requires them to
have a written liquidity policy in place, and as part
of that policy it has a list of the sources that they
would go to if they had an emergency liquidity need. For institutions that are
over 50 million there’s the additional requirement that
those institutions would also have to have a, what we
call a contingency funding plan, which is a more robust
liquidity plan. And I think the key
distinctions there are that those institutions that are
using a contingency funding plan have to have a process
where they identify potential liquidity stresses
they’re doing; Liquidity testing on a forecasted
basis, if you will. And that’s something that
they have to examine annually to determine
whether or not that’s sufficiently meeting their
needs. And then lastly for credit
unions over 250 million, those institutions would
need to have in place a relationship with a federal
contingent liquidity provider. And the rule defines that is
either being the central liquidity facility or the federal reserves
discount window. And to give you an idea of
the numbers that we’re talking about here at the 50
million and below level, that’s essentially two
thirds of our federally insured credit unions that
would have that most basic requirement and so
conversely one third of the fifty million and over would
have this contingency funding plan requirement. And again the 250 million or
more they only represent about roughly 10% of all
credit unions but they hold almost 80% of the assets so
you have not a large number of institutions that are
complying with that requirement and we know from
the June call report data that roughly half of those
are in compliance with that provision of the rule
already. LARRY FAZIO: The new rule
becomes effective March 31st of 2014. All of the requirements that
apply to that new rule become effective on that
date. As Owen had articulated
earlier for all credit unions having a basic
liquidity policy needs to be in place by March 31st,
2014. For credit unions greater
than 50 million in assets they also need to have the
contingency funding plan and of course the largest credit
unions of 250 million or more need to also make sure
they belong to either the CLF or the federal reserve
discount window. Now we also published a
letter to credit unions that explains all of this. And there’s an aspect of the
rule that has a delayed effect of data in a sense
that the letter to credit unions describes that
there’s a testing component that credit unions have to
do annually relative to the CLF or the discount window
so that would apply to the 250 million or greater in
asset credit unions, and that initial test they have
to conduct needs to be completed by the end of 2014,
and then annually thereafter. OWEN COLE: So for those of
you who want to know how to join the CLF, probably the
easiest thing to do is to go to NCUA’s website, NCUA.gov
and click on the page for the Central Liquidity
Facility and we have links there that will take you to
the membership application process and all of the forms
that you will need to download and print and
complete and send to CLF. It also includes contact
information and phone number for CLF staff so the easiest
thing to do is once you find that information is to give
us a call and we will guide you through the process. OWEN COLE: And with respect
to establishing relations with the Federal Reserve
Discount window you would want to contact your
respective federal reserve bank and discount window
staff. And they also have a website
that contains information about the window, I think
the first page is called ‘Getting Started’ and like
CLF it will walk you through the process for what you
need to do to establish those relations. And Larry mentioned in the
letter to credit unions that we also provide information,
both about CLF and the Federal Reserve Discount
window and they encourage credit unions to go ahead
and reach out to those respective entities once
they determine the source that they want to use for
that contingent federal liquidity source and the
federal reserve staff are aware and prepared to take
those calls and walk you through the process. LARRY FAZIO: For credit
unions that want more information, they can go to
our website at www.NCUA.gov. We actually have a letter to
credit unions, letter number 13CU10 that explains in
detail the new rule, how it works, how we’ll examine for
it, when it’s effective, and where to get more information,
mostly on our website. The letter has an appendix
on how to join the CLF, how to establish an account with
the Federal Reserve Discount window, where to get more
information. So the best place to go,
www.NCUA.gov

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