[Federal Register Volume 78, Number 210 (Wednesday, October 30, 2013)]
[Rules and Regulations]
[Pages 64879-64883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-25714]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741

RIN 3133-AD96


Liquidity and Contingency Funding Plans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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[[Page 64880]]

SUMMARY: The NCUA Board (Board) is issuing a final rule to require 
federally insured credit unions (FICUs) with less than $50 million in 
assets to maintain a basic written policy that provides a credit union 
board-approved framework for managing liquidity and a list of 
contingent liquidity sources that can be employed under adverse 
circumstances. The rule requires FICUs with assets of $50 million or 
more to have a contingency funding plan that clearly sets out 
strategies for addressing liquidity shortfalls in emergency situations. 
Finally, the rule requires FICUs with assets of $250 million or more to 
have access to a backup federal liquidity source for emergency 
situations.

DATES: This rule is effective March 31, 2014.

FOR FURTHER INFORMATION CONTACT: Lisa Henderson, Staff Attorney, Office 
of General Counsel, (703) 518-6540; or J. Owen Cole, Jr., Director, 
Division of Capital and Credit Markets, Office of Examination and 
Insurance, (703) 518-6620.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Why is NCUA adopting this final rule?
    B. What did the 2012 proposed rule say?
    C. How did the commenters respond to the 2012 proposed rule?
II. Final Rule
    A. In general
    B. How does the final rule affect FICUs with less than $50 
million in assets?
    C. How does the final rule affect FICUs with $50 million or more 
in assets?
    D. What additional requirements apply to FICUs with $250 million 
or more in assets?
    E. How are a FICU's assets calculated for purposes of the final 
rule?
    F. Request for Comment Regarding Basel Liquidity
III. Regulatory Procedures

I. Background

A. Why is NCUA adopting this final rule?

    The recent financial crisis demonstrated the importance of good 
liquidity risk management to the safety and soundness of financial 
institutions. Many institutions experienced significant financial 
stress because they did not manage their liquidity in a prudent manner. 
In some cases, these institutions had difficulty meeting their 
obligations as they became due because sources of funding became 
severely restricted. In the financial crisis, even institutions that 
were healthy used emergency federal liquidity facilities when funding 
costs became prohibitively high. At the time, the borrowing authority 
of NCUA's Central Liquidity Facility (CLF) was more than $40 billion, 
and it was able to play a significant role in making liquidity 
available to credit unions. Because of the 2012 closure of U.S. Central 
Credit Union and the redemption of most of its CLF stock, however, the 
CLF's borrowing authority has been reduced to just over $2 billion.
    These events followed several years of ample liquidity. The rapid 
reversal in market conditions and availability of liquidity during the 
crisis illustrated how quickly liquidity can evaporate. This 
illiquidity can last for an extended period, leading to an 
institution's inability to meet its financial obligations and possibly 
its insolvency. Many of the liquidity-related difficulties experienced 
by financial institutions were due to lapses in basic principles of 
liquidity risk management. This rule will strengthen FICU liquidity 
risk management, which is crucial to ensuring the credit union system's 
resiliency during periods of financial market stress.

B. What did the 2012 proposed rule say?

    The 2012 proposed liquidity rule required FICUs with less than $10 
million in assets to maintain a written liquidity policy, including a 
list of contingent liquidity sources.\1\ It also required FICUs with 
assets of $10 million or more to have a contingency funding plan (CFP) 
that clearly sets out strategies for addressing liquidity shortfalls in 
emergency situations. Finally, it required FICUs with assets of $100 
million or more to have access to either the CLF or the Federal Reserve 
Discount Window (Discount Window). The proposed rule also requested 
comment on the costs and benefits of applying Basel III liquidity 
measures to FICUs with assets over $500 million.\2\
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    \1\ 77 FR 44503 (July 30, 2012).
    \2\ See Basel Committee on Banking Supervision, ``Basel III: 
International Framework for Liquidity Risk Measurement, Standards 
and Monitoring,'' Dec. 2010, available at http://www.bis.org/publ/bcbs188.htm.
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 C. How did the commenters respond to the 2012 proposed rule?

    NCUA received 45 comments on the proposed rule. More than half of 
the commenters urged that the rule not go forward, stating that NCUA 
had not justified a need for a liquidity regulation and that the 
guidance provided by the 2010 Interagency Policy Statement on Funding 
and Liquidity Risk Management (Policy Statement) \3\ was sufficient to 
control liquidity risk. Twenty commenters stated that any emergency 
liquidity regulation should include the option of membership in a 
Federal Home Loan Bank (FHLB), and ten stated that it should include 
the option of holding marketable securities.
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    \3\ 75 FR 13656 (Mar. 22, 2010).
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    A number of commenters praised the three-tiered approach, although 
12 suggested that the lower threshold should be raised to match NCUA's 
then-proposed amendment to the definition of ``small entity.'' \4\ 
Seven commenters suggested that the higher threshold should be raised. 
Six stated that asset size is a poor basis on which to determine 
whether liquidity requirements should be imposed.
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    \4\ See 77 FR 59139 (Sept. 26, 2012).
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    Several commenters seemed confused about the proposed requirement 
that FICUs with assets of $100 million or more have access to the CLF 
or Discount Window. Their comments suggested they believed the 
requirement meant that these larger credit unions would be prohibited 
from establishing other sources of liquidity. This is incorrect. As 
discussed in greater detail below, the Board encourages all FICUs to 
have multiple sources of liquidity.
    Twenty-five commenters objected to the CLF's structure, 
specifically the required stock investment and the CLF's inability to 
guarantee same-day funding. The Board notes that the stock investment 
is required under the Federal Credit Union Act.\5\ The Board also notes 
that the CLF cannot guarantee same-day funding to credit unions because 
it borrows the funds it lends from the Federal Financing Bank under 
terms prescribed by the U.S. Treasury.
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    \5\ See generally 12 U.S.C. 1795-1795k.
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    Eighteen commenters either opposed applying Basel III liquidity 
measures and monitoring tools to FICUs with assets over $500 million or 
suggested that NCUA proceed very slowly in considering such 
application.

II. Final Rule

A. In General

    After careful consideration of the comments, the Board has 
concluded that a liquidity rule is necessary to ensure that FICUs 
remain resilient in times of economic stress. It, therefore, is 
adopting as final a modified version of the 2012 proposed rule. As 
discussed in greater detail below, this final rule addresses concerns 
raised by the commenters. Accordingly, the Board is adding a new Sec.  
741.12 to part 741, titled ``Liquidity and Contingency Funding Plans.'' 
The Board believes that FICUs, relying on the guidance provided in the 
Policy Statement, generally have

[[Page 64881]]

managed liquidity risk adequately. However, the financial crisis 
highlighted the importance for FICUs to have strong policies and 
programs explicitly addressing the credit union's liquidity risk 
management. The Board believes it is critical to expand the credit 
union industry's borrowing capacity after the liquidation of U.S. 
Central Credit Union.
    The Board is retaining the tiered approach of the proposed rule and 
is continuing to base the tiers on asset size. The Board believes that, 
while there are exceptions, larger credit unions generally present 
greater exposure to the NCUSIF. The Board is, however, raising the 
triggering thresholds from those in the proposed rule.
    Since the proposed rule was issued, the Board revised the 
definition of ``small entity'' from a credit union with less than $10 
million in assets to one with less than $50 million in assets.\6\ The 
Board also amended two NCUA regulations that grant relief based on an 
asset threshold, raising that threshold from $10 million to $50 
million.\7\ For regulatory relief and regulatory consistency, the Board 
is raising the lowest threshold in this rule--requiring a basic written 
policy--to include credit unions with less than $50 million in assets.
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    \6\ 78 FR 4032 (Jan. 18, 2013).
    \7\ Id.
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    In response to comments, and to reduce regulatory burden, the Board 
is raising the highest threshold--requiring established access to a 
federal liquidity provider--from $100 million to $250 million. While 
the Board encourages FICUs with assets between $100 million and $250 
million to have this access, the Board is not requiring it at this 
time.

B. How does the final rule affect FICUs with less than $50 million in 
assets?

    The Board continues to believe that it is essential for every FICU, 
regardless of size and complexity, to have a management process for 
identifying, measuring, monitoring, and controlling liquidity risk that 
is commensurate with its respective needs. FICUs with less than $50 
million in assets present relatively limited liquidity concerns, as 
they tend to have lower loan-to-share ratios, shorter duration assets, 
and higher amounts of balance sheet liquidity than larger credit 
unions. Accordingly, Sec.  741.12(a) of the final rule requires these 
smaller FICUs to maintain a basic written policy that provides a credit 
union board-approved framework for managing liquidity and a list of 
contingent liquidity sources that can be employed under adverse 
circumstances. Such a policy establishes liquidity measures and 
associated benchmarks, a reporting requirement to keep the board 
apprised of the institution's liquidity position, and a contingent 
source, or sources, of funding, such as a corporate credit union or 
correspondent bank.

 C. How does the final rule affect FICUs with $50 million or more in 
assets?

    Section 741.12(b) requires any FICU with assets of at least $50 
million to have a fully developed, written CFP that clearly sets out 
strategies for addressing liquidity shortfalls in emergency situations. 
In addition to the policy items required for smaller FICUs, a fully 
developed CFP also provides for evaluation of adverse liquidity 
scenarios, outlines specific actions to be taken and specific sources 
of liquidity in emergency liquidity events, and provides for periodic 
testing of contingent liquidity sources. Section 741.12(d) of the final 
rule details all of the requirements of a CFP. The Board is imposing 
greater requirements on these larger FICUs because of the critical 
importance of a well-developed CFP to the viability of these 
institutions and, ultimately, the safety of the NCUSIF.

D. What additional requirements apply to FICUs with $250 million or 
more in assets?

    In addition to the requirement to have a written CFP, Sec.  
741.12(c) of the final rule requires any FICU with assets of $250 
million or more to ensure it has immediate, established access to 
either the CLF or the Discount Window. These larger credit unions have 
a greater degree of interconnectedness with other market entities. When 
they experience unexpected or severe liquidity circumstances, they are 
more likely to adversely affect the credit union system, public 
perception, and the NCUSIF.
    The Board determined not to include FHLB membership as a federal 
contingency source for purposes of meeting the requirements of this 
rule. As discussed in the preamble to the proposed rule, FHLBs can be 
valuable contingency funding sources. However, while government 
sponsored, FHLBs are not federal facilities and are not obligated to 
meet emergency liquidity demands in the same way that the CLF and 
Discount Window are designed to do. The Board also declines to allow 
large FICUs to meet the requirements of the rule by holding a portfolio 
of marketable securities. While it is prudent for every FICU to have a 
cushion of highly liquid assets on its balance sheet, these assets have 
proven to be insufficient in a crisis.
    The Board emphasizes that all FICUs should have access to multiple 
sources of funding, from both their own balance sheets and through 
market funding sources. In requiring the largest FICUs to have 
established access to the CLF or the Discount Window, the Board is not 
suggesting that these sources are sufficient by themselves. FICUs with 
assets of $250 million or more should have three distinct sources of 
liquidity readily available.
    First, all FICUs should maintain a balance sheet cushion of highly 
liquid assets as a basic element of liquidity risk management. It is 
essential for FICUs of all sizes to hold an adequate safeguard of cash 
and cash equivalents (such as short-term deposits and Treasury 
securities) on the balance sheet continuously. A balance-sheet cushion 
affords an institution time to avoid service disruptions and enter 
external funding arrangements if necessary.
    A second element of liquidity management is borrowing from market 
counterparties, such as corporate credit unions, correspondent banks, 
FHLBs, and repurchase agreement counterparties. The ability to borrow 
from market sources requires having unencumbered assets that can be 
readily pledged against a loan. Larger FICUs with greater potential 
funding needs should have multiple stable borrowing sources and a clear 
understanding of which assets can be pledged.
    The third element of protection is access to a federal emergency 
liquidity provider: The CLF or the Discount Window. These providers 
exist to provide backup liquidity in circumstances where on-balance 
sheet liquidity and market sources prove inadequate. Like the market 
funding sources, the CLF and Discount Window are both collateral-based 
lending facilities. The Board believes that, to protect the NCUSIF, it 
is essential for FICUs with assets of at least $250 million to have 
this third element of liquidity in place.
    The rule provides that a FICU may demonstrate access by becoming a 
regular member of the CLF, becoming a member of the CLF through an 
agent, or establishing borrowing access through the Discount Window. As 
discussed in the preamble to the proposed rule, corporate credit unions 
may facilitate natural person credit unions becoming regular CLF 
members by, for example, assisting with applications of credit, serving 
as a collateral custodian and

[[Page 64882]]

administrator, and assisting with credit reporting requirements.\8\
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    \8\ A corporate acting as a CLF correspondent would not be an 
agent member of the CLF within the meaning of 12 U.S.C. 1795c(b) or 
12 CFR 725.4, as it would not subscribe to CLF stock for its 
members. For a natural person credit union to be a regular member of 
the CLF, it must subscribe to CLF stock. 12 U.S.C. 1795c(a); 12 CFR 
725.3.
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    The Discount Window serves all depository institutions that meet 
eligibility requirements established by Federal Reserve regulations.\9\ 
To gain access to the Discount Window, the Federal Reserve requires 
specific agreements to be executed. Information regarding these 
agreements, as set forth in Operating Circular No. 10, and Discount 
Window operation can be found at www.frbdiscountwindow.org.
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    \9\ Any depository institution holding liabilities potentially 
subject to reserve requirements under Federal Reserve regulations 
can establish access to the Discount Window. Such ``reserveable 
liabilities'' include transaction accounts and nonpersonal time 
deposits. For most credit unions, share draft accounts would be the 
principal reserveable liability. See 12 CFR part 204.
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    The Board notes that, while not required in the final rule, a FICU 
may wish to both become a member of the CLF and establish borrowing 
access at the Discount Window. The combination of the CLF and the 
Discount Window would provide the greatest protection in the event of a 
sudden and sustained liquidity emergency. The Discount Window is 
designed to handle sudden emergencies that require same-day access to 
liquidity. The CLF, on the other hand, is designed to handle sustained 
emergencies that require federal backup liquidity for several months.
    The following table shows some of the similarities and differences 
between the CLF and the Discount Window.

------------------------------------------------------------------------
                             Federal reserve         Central Liquidity
                             discount window          Facility (CLF)
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Similarities...........  Both the Discount Window and the CLF function
                          as safety valves to relieve liquidity pressure
                          on individual depository institutions and to
                          stabilize broader liquidity systems.
                        ------------------------------------------------
                             Both are fully secured collateral-based
                                             lenders.
                        ------------------------------------------------
                         Both met emergency liquidity needs for
                          individual institutions and for entire systems
                          during the latest financial crisis.
                        ------------------------------------------------
Differences............  The Fed is able to       CLF funding may take 1-
                          advance same-day funds   10 business days
                          to qualifying credit     depending on the
                          unions (subject to       requested dollar
                          collateral               amount (also subject
                          requirements).           to collateral
                                                   requirements).
                         The Fed's overnight      The CLF makes loans up
                          loans may be             to 90 days, and these
                          renewable, but any       90-day loans may be
                          series of rollovers is   renewed for an
                          expected to be brief     additional term under
                          in duration.             certain
                                                   circumstances.
------------------------------------------------------------------------

    With established access to both, in a liquidity crisis, when 
balance sheet and market sources are not enough, a FICU would have the 
ability to immediately obtain federal backup liquidity through the 
Discount Window. If the FICU's emergency liquidity needs persist for 
more than a few days, the FICU would have the flexibility to maintain 
federal backup liquidity through the CLF for several months at a time. 
The amount of liquidity advances available from either facility is a 
function of the eligible collateral available to pledge.
    A FICU with $250 million or more in assets will be in compliance 
with this final rule if, by the effective date of March 31, 2014, it 
has submitted either a completed application for access to the CLF or 
the necessary lending agreements and corporate resolutions to obtain 
credit from the Discount Window.

E. How are a FICU's assets calculated for purposes of the final rule?

    Credit unions' assets can grow and shrink rapidly, and a particular 
FICU's assets may cross the $50 million or $250 million threshold 
repeatedly over a short period of time. In light of this fluctuation, 
Sec.  741.12(e) of the final rule provides that a FICU is subject to 
the requirements of a higher asset category when two consecutive Call 
Reports show its assets to be in that higher category. A FICU will then 
have 120 days from the effective date of that second Call Report to 
meet the higher triggered requirements.

F. Request for Comment Regarding Basel Liquidity

    In the proposed rule, the Board requested comment on whether 
certain Basel III liquidity measures and monitoring tools should be 
incorporated into NCUA's supervisory expectations for the largest 
FICUs. In response to comments, the Board has determined not to take up 
the Basel measures at this time.

III. Regulatory Procedures

a. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any regulation may have on 
a substantial number of small entities (those under $50 million in 
assets). The final rule requires small FICUs to establish a basic 
liquidity policy, which is a best practice for every depository 
institution. Because the policy requires only modest effort, it will 
not have a significant economic impact on a substantial number of small 
credit unions.

b. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden.\10\ For purposes of the PRA, a 
paperwork burden may take the form of a reporting, recordkeeping, or 
disclosure requirement, each referred to as an information collection.
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    \10\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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    NCUA has determined the requirement to maintain a basic written 
liquidity policy is an information collection requirement. NCUA 
estimates that all 4,444 credit unions under $50 million in total 
assets may have to formalize their liquidity risk policies and that 
this task should take approximately 8 hours per credit union. The 
expected burden of the requirement is: 4,444 FICUs x 8 hours = 35,552 
hours.
    NCUA has further determined the requirement to establish and 
document a CFP constitutes an information collection requirement but 
that, because of the Policy Statement, approximately 447 out of 2,237 
(or 20%) of FICUs with assets of at least $50 million will already have 
established such a plan. NCUA estimates that 1,790 FICUs will have to 
develop a written CFP and that the task should take a FICU 
approximately 24 hours. The expected

[[Page 64883]]

burden of the requirement is: 1,790 FICUs x 24 hours = 42,960 hours.
    NCUA has also determined the requirement to either become a member 
of the CLF or establish borrowing access through the Discount Window 
creates a new information collection requirement. There are 771 FICUs 
with assets of at least $250 million, 374 of which are not currently 
regular members of CLF and/or do not report having established Discount 
Window access. NCUA estimates that it should take a FICU approximately 
4 hours to complete the necessary paperwork to establish either CLF or 
Discount Window access. The expected burden of the requirement is: 374 
FICUs x 4 hours = 1,496 hours.
    While the regulation provides the option of establishing CLF 
membership through an agent, NCUA estimates that no corporates will opt 
to be agent members at this time and, therefore, no FICUs will 
establish membership in this manner.
    As required by the PRA, NCUA submitted a copy of this final rule to 
OMB for its review and approval.

c. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This final rule does not have substantial direct 
effects 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 rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

d. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

e. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by section 551 of the Administrative 
Procedure Act.\11\ NCUA does not believe this final rule is a ``major 
rule'' within the meaning of the relevant sections of SBREFA and has 
submitted the rule to the Office of Management and Budget for its 
determination in that regard.
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    \11\ 5 U.S.C. 551.
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List of Subjects in 12 CFR Part 741

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on October 24, 
2013.
Gerard Poliquin,
Secretary of the Board.

    For the reasons stated above, the National Credit Union 
Administration amends 12 CFR part 741 as follows:

PART 741--REQUIREMENTS FOR INSURANCE

0
1. The authority citation for part 741 continues to read as follows:

    Authority:  12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

0
2. Add Sec.  741.12 to subpart A to read as follows:


Sec.  741.12  Liquidity and Contingency Funding Plans.

    (a) Any credit union insured pursuant to Title II of the Act that 
has assets of less than $50 million must maintain a basic written 
policy that provides a credit union board-approved framework for 
managing liquidity and a list of contingent liquidity sources that can 
be employed under adverse circumstances.
    (b) Any credit union insured pursuant to Title II of the Act that 
has assets of $50 million or more must establish and document a 
contingency funding plan (CFP) that meets the requirements of paragraph 
(d) of this section.
    (c) In addition to the requirement specified in paragraph (b) of 
this section to establish and maintain a CFP, any credit union insured 
pursuant to Title II of the Act that has assets of $250 million or more 
must establish and document access to at least one contingent federal 
liquidity source for use in times of financial emergency and distressed 
economic circumstances. These credit unions must conduct advance 
planning and periodic testing to ensure that contingent funding sources 
are readily available when needed. A credit union subject to this 
paragraph may demonstrate access to a contingent federal liquidity 
source by:
    (1) Maintaining regular membership in the Central Liquidity 
Facility (Facility), as described in part 725 of this chapter;
    (2) Maintaining membership in the Facility through an Agent, as 
described in part 725 of this chapter; or
    (3) Establishing borrowing access at the Federal Reserve Discount 
Window by filing the necessary lending agreements and corporate 
resolutions to obtain credit from a Federal Reserve Bank pursuant to 12 
CFR part 201.
    (d) Contingency Funding Plan: A credit union must have a written 
CFP commensurate with its complexity, risk profile, and scope of 
operations that sets out strategies for addressing liquidity shortfalls 
in emergency situations. The CFP may be a separate policy or may be 
incorporated into an existing policy such as an asset/liability policy, 
a funds management policy, or a business continuity policy. The CFP 
must address, at a minimum, the following:
    (1) The sufficiency of the institution's liquidity sources to meet 
normal operating requirements as well as contingent events;
    (2) The identification of contingent liquidity sources;
    (3) Policies to manage a range of stress environments, 
identification of some possible stress events, and identification of 
likely liquidity responses to such events;
    (4) Lines of responsibility within the institution to respond to 
liquidity events;
    (5) Management processes that include clear implementation and 
escalation procedures for liquidity events; and
    (6) The frequency that the institution will test and update the 
plan.
    (e) A credit union is subject to the requirements of paragraphs (b) 
or (c) of this section when two consecutive Call Reports show its 
assets to be at least $50 million or $250 million, respectively. A FICU 
then has 120 days from the effective date of that second Call Report to 
meet the greater requirements.

[FR Doc. 2013-25714 Filed 10-29-13; 8:45 am]
BILLING CODE 7535-01-P