[Federal Register Volume 65, Number 207 (Wednesday, October 25, 2000)]
[Notices]
[Pages 63892-63894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27362]


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NATIONAL CREDIT UNION ADMINISTRATION


Central Liquidity Facility

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed Interpretive Ruling and Policy Statement (IRPS) 00-2, 
``Central Liquidity Facility Advance Policy'', with request for 
comments.

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SUMMARY: This policy statement is intended to clarify the role of the 
Central Liquidity Facility (CLF) and the circumstances when the CLF 
will approve a Regular or Agent Member's request for a CLF advance.

DATES: NCUA welcomes comments on this proposed IRPS. Comments must be 
received on or before December 26, 2000.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the 
Board. Mail or hand-deliver comments to: National Credit Union 
Administration, 1775 Duke Street, Alexandria, VA 22314-3428. You may 
also fax comments to (703) 518-6319 or e-mail comments to 
[email protected]. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: J. Owen Cole, Jr., Vice President, 
CLF, at the above address, or telephone: (703) 518-6360 or Frank S. 
Kressman, Staff Attorney, at the above address, or telephone: (703) 
518-6540.

SUPPLEMENTARY INFORMATION:

Background

    The CLF operates in accordance with Title III of the Federal Credit 
Union Act (Act) and Part 725 of NCUA's regulations which implements 
Title III. 12 U.S.C. 1795-1795k; 12 CFR part 725. It was created in 
1979 to improve the general financial stability of the credit union 
industry by helping to meet the liquidity needs of individual credit 
unions. This improved stability encourages savings, supports consumer 
and mortgage lending, and helps provide basic financial resources to 
all segments of the economy. In continuing to fulfill this mission, the 
CLF wishes to clarify its function and limitations in an ever-changing 
financial services environment.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact agency rulemaking may have 
on a substantial number of small credit unions. For purposes of this 
analysis,

[[Page 63893]]

credit unions under $1 million in assets are considered small credit 
unions. As of June 30, 1999, there were 1,690 small credit unions with 
a total of $807.3 million in assets, having an average size of $0.5 
million. Small credit unions make up 15.6% of all credit unions, but 
only 0.2% of all credit union assets.
    This proposed IRPS clarifies the role of the CLF and the 
circumstances when the CLF will approve advances. This proposed IRPS 
imposes no additional financial, regulatory, or other burden whatsoever 
on credit unions transacting business with the CLF. The NCUA has 
determined and certifies that this proposed IRPS will not have a 
significant economic impact on a substantial number of small credit 
unions.

Paperwork Reduction Act

    NCUA has determined that this proposed IRPS does not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on state and local 
interests. In adherence to fundamental federalism principles, NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order.
    This proposed IRPS applies to all credit unions doing business with 
the CLF, but does not have substantial direct effect on the states, on 
the relationship between the national government and the states, or on 
the distribution of power and responsibilities among the various levels 
of government. NCUA has determined that this proposed IRPS does not 
constitute a policy that has federalism implications for purposes of 
the executive order.

    By the National Credit Union Administration Board, on October 
19, 2000.
Becky Baker,
Secretary of the Board.
    For the reasons stated above, NCUA proposes that IRPS 00-2 read as 
follows:
    1. The authority citation for part 725 continues to read as 
follows:

    Authority: 12 U.S.C. 1795-1795f.

    2. IRPS 00-2 is proposed as follows:

Interpretive Ruling and Policy Statement No. 00-2

Central Liquidity Facility Advance Policy

Purpose

    Congress established the Central Liquidity Facility (CLF) in 
1979 and authorized the NCUA Board, acting as the CLF Board, to 
prescribe the manner in which the general business of the CLF is to 
be conducted. The CLF was created to improve the general financial 
stability of the credit union industry by meeting the liquidity 
needs of individual credit unions. This improved stability 
encourages savings, supports consumer and mortgage lending, and 
helps provide basic financial resources to all segments of the 
economy. This policy statement is intended to clarify the role of 
the CLF and the circumstances under which the CLF will approve a 
Regular or Agent Member's request for a CLF advance.

Liquidity Needs

    The liquidity needs of natural person credit unions for which 
CLF advances are appropriate are limited to:
    A. Short-term adjustment credit available to assist in meeting 
temporary requirements for funds or to cushion more persistent 
outflows of funds pending an orderly readjustment of credit union 
assets and liabilities;
    B. Seasonal credit available for longer periods to assist in 
meeting seasonal needs for funds arising from a combination of 
expected patterns of movement in share and deposit accounts and 
loans; and
    C. Protracted adjustment credit available in the event of 
unusual or emergency circumstances of a longer-term nature resulting 
from national, regional or local difficulties.
    Short-term adjustment credit advances generally are available 
for maturity periods of up to 90 days. Seasonal credit advances are 
available for periods of up to 270 days. Seasonal credit is 
generally restricted to institutions that can demonstrate a pattern 
of recurring need. Seasonal credit advance requests must be 
supported by an analysis that includes at least two years of 
detailed seasonal flow of funds data. Protracted adjustment credit 
advances that are available for periods in excess of 270 days are 
only made when exceptional circumstances are adversely affecting an 
individual institution. CLF loan officers exercise considerable 
discretion in extending protracted adjustment credit and may consult 
with NCUA supervisory authorities to address any concerns over the 
credit union's ability to restore liquidity and remain viable. As is 
the case with short-term adjustment credit and seasonal credit, CLF 
may decline a credit union's request for protracted adjustment 
credit for creditworthiness reasons. It may also refer the credit 
union to the appropriate NCUA Regional Director for possible NCUSIF 
special assistance under Section 208 of the Act. 12 U.S.C. 208.

Role of the CLF

    Historically, CLF advances have been intended only to help 
maintain financial stability for credit unions that were 
experiencing liquidity difficulties or expected to experience 
liquidity difficulties in the immediate future. In most instances, 
CLF makes advances when the borrower's primary sources of liquidity 
are inadequate, impracticable or otherwise unavailable at the time 
of need. CLF is prohibited by statute from making an advance the 
intent of which is to expand credit union portfolios. 12 U.S.C. 
1795e(a)(1).
    NCUA acknowledges the need for the CLF to operate in a flexible 
manner. While NCUA recognizes that CLF is not to be considered the 
``lender of last resort'', NCUA also understands that CLF is not to 
be used as a conventional funding facility or standard market 
alternative for borrowing credit unions. Rather, NCUA's long-
standing position is that the CLF was established to be used 
sparingly as a stabilizing agent in times when liquidity needs 
threaten to disrupt credit unions' ability to provide basic 
financial resources to their members. Accordingly, NCUA's long-held 
policy that the CLF is a backup liquidity provider remains 
unchanged.
    Although CLF advances are available when appropriate, NCUA 
emphasizes the importance of liquidity planning and contingency 
funding. NCUA expects credit unions to have in place adequate 
programs and procedures to manage their liquidity risk. Each credit 
union's liquidity management program should be appropriate for the 
overall level of risk incurred, considering its asset size, 
complexity, capital adequacy, and products or services offered. 
Inadequate liquidity can cause disruptions in member services and 
diminish public confidence. It can also increase a credit union's 
vulnerability to other market and operational risks. The failure to 
understand and manage liquidity risk adequately could easily place a 
credit union in an unsafe and unsound financial position.
    As part of normal contingency planning, credit unions are 
expected to develop funding plans that include credit lines that are 
accessible on a timely basis. This may be accomplished with a 
corporate credit union or other source. The appropriateness of 
granting a CLF advance depends on the circumstances of the credit 
union at the time of the liquidity need. Appropriate circumstances 
for seeking CLF advances may include borrowing:
     To meet an unexpected loss in shares or nonmember 
funds;
     To address an unexpected surge of credit demands within 
the credit union's membership; and
     To meet liquidity needs due to forces beyond the 
immediate control of the credit union such as an internal operating 
problem or a natural disaster.
    Among other circumstances, borrowing from CLF is not 
appropriate:
     To take advantage of a differential between the rate of 
a CLF advance and the rate of alternative sources of funds known as 
spread arbitrage;
     To substitute CLF credit for normal, short-term, 
interest-sensitive shares such as certificates or money market 
shares; or
     to support a planned increase in loans or investment 
holdings or new loan product offerings.

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    CLF will monitor, as necessary, the frequency and duration of a 
credit union's CLF borrowings to make certain that the credit union 
is taking appropriate measures to diminish reliance on CLF advances 
and verify that a more serious liquidity problem does not exist. 
Borrowers are expected to initiate appropriate actions to restore 
adequate liquidity within a reasonable period of time. Facility loan 
officers, at their discretion, may require a borrowing credit union 
to prepare a liquidity restoration plan to detail the action and 
time required to restore its net funds position to the point where 
it is no longer dependent on CLF advances.

[FR Doc. 00-27362 Filed 10-24-00; 8:45 am]
BILLING CODE 7535-01-P