National Credit Union Central Liquidity Facility Lending Before the Year
2000 Date Change (Correspondence, 05/23/2000, GAO/GGD-00-143R).

Pursuant to a congressional request, GAO reviewed the lending activity
of the National Credit Union Central Liquidity Facility (CLF), focusing
on: (1) CLF's lending during October through December 1999; and (2)
credit union borrowing from the discount window and the comparison
between credit unions' cost of borrowing from CLF to the cost of
alternative sources of liquidity.

GAO noted that: (1) CLF lending increased during the last 3 months of
1999; (2) because of the prospect of problems related to the year 2000
date change, CLF set up expedited procedures for lending in order to
meet year 2000-related liquidity demands; (3) as a result, any credit
union qualifying for access with a stated liquidity need was eligible to
obtain loans from CLF; (4) however, of the approximately 10,000 credit
unions in the United States, less than 1 percent (38 in total) of all
credit unions obtained loans from CLF during the October through
December 1999 timeframe; (5) although the total amount that CLF loaned
was about $666 million, the largest value of loans outstanding on any
given day was about $159 million; (6) in most cases, the determination
regarding whether a credit union would obtain a loan from CLF was made
by the credit union's corporate credit union; (7) when a credit union
notified its corporate credit union of a need to borrow liquidity, the
corporate credit union decided whether to make a loan to the credit
union itself or to go to CLF on behalf of the credit union; (8) during
this same period, 25 credit unions also borrowed from the Federal
Reserve's discount window; (9) by law, use of the discount window
requires that all borrowers, including credit unions, maintain
reservable transaction accounts or nonpersonal time deposits; (10)
nearly two-thirds of all credit unions qualify for access to the
discount window, including most of the largest; (11) of the two types of
discount window credit most used by credit unions during this period,
one--adjustment credit--had an interest rate somewhat lower than the
rate charged by CLF; (12) the rate on the other widely used discount
window loan--the Special Liquidity Facility, which was a special credit
available in advance of year 2000--was considerably higher than the CLF
rate; (13) under ordinary circumstances, corporate credit union
officials said that most credit unions would look first to their
corporate credit union to satisfy liquidity needs; (14) the rates that
two corporate credit unions charged their members for non-CLF loans were
also higher than the CLF charged; and (15) however, because the
corporate credit unions increased the rate they charged on CLF loans to
cover expenses before passing CLF credit on to their member credit
unions, the actual rate paid by members of the two corporate credit
unions for CLF loans was closer to the rates charged for non-CLF
liquidity loans.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-00-143R
     TITLE:  National Credit Union Central Liquidity Facility Lending
	     Before the Year 2000 Date Change
      DATE:  05/23/2000
   SUBJECT:  Credit unions
	     Loans
	     Y2K
	     Comparative analysis
	     Interest rates
IDENTIFIER:  Y2K

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United States General Accounting Office
GAO

GAO/GGD-00-143R

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B-285159
Page 2GAO/GGD-00-143R CLF Lending to Credit Unions Before Year
2000 Date Change
B-285159

May 23, 2000

The Honorable James A. Leach
Chairman
Committee on Banking and Financial Services
House of Representatives

The Honorable John L. LaFalce
Ranking Minority Member
Committee on Banking and Financial Services
House of Representatives

The Honorable Marge Roukema
Chair
Subcommittee on Financial Institutions and Consumer Credit
House of Representatives

Subject: National Credit Union Central Liquidity Facility
Lending Before the Year 2000 Date Change

This letter responds to your request that we review the
lending activity of the National Credit Union Central
Liquidity Facility (CLF) during October through December 1999,
prior to the Year 2000 date change. CLF is part of the
National Credit Union Administration (NCUA). It was
established in 1979 to ensure that credit unions would be able
to borrow funds for liquidity needs. After Congress removed
CLF's $600 million lending cap in anticipation of potential
Year 2000 liquidity demands, there was a sudden increase in
CLF lending to credit unions. You were interested in finding
out why such an increase in lending occurred and the nature of
the lending. You also asked us to look at the availability and
cost of other sources of liquidity for credit unions during
this periodin particular, credit union borrowing from the
Federal Reserve's discount window. As agreed with your
offices, the objectives of this letter are to (1) summarize
CLF's lending during this period and (2) describe credit union
borrowing from the discount window and compare credit unions'
cost of borrowing from CLF to the cost of alternative sources
of liquidity.

Results in Brief

CLF lending increased during the last 3 months of 1999.
Because of the prospect of problems related to the Year 2000
date change, CLF set up expedited procedures for lending in
order to meet Year 2000-related liquidity demands. As a
result, any credit union qualifying for access with a stated
liquidity need was eligible to obtain loans from CLF. However,
of the approximately 10,000 credit unions in the United
States, less than 1 percent (38 in total) of all credit unions
obtained loans from CLF during the October through December,
1999, time frame. Although the total amount that CLF loaned
was about $666 million, the largest value of loans outstanding
on any given day was about $159 million. In most cases, the
determination regarding whether a credit union would obtain a
loan from CLF was made by the credit union's corporate credit
union.1 When a credit union notified its corporate credit
union of a need to borrow liquidity, the corporate credit
union decided whether to make a loan to the credit union
itself or to go to CLF on behalf of the credit union.

During this same period, 25 credit unions also borrowed from
the Federal Reserve's discount window. By law, use of the
discount window requires that all borrowers, including credit
unions, maintain reservable transaction accounts or
nonpersonal time deposits. Nearly two-thirds of all credit
unions qualify for access to the discount window, including
most of the largest. Of the two types of discount window
credit most used by credit unions during this period,
one-adjustment credithad an interest rate somewhat lower than
the rate charged by CLF. The rate on the other widely used
discount window loan-the Special Liquidity Facility (SLF),
which was a special credit available in advance of the Year
2000-was considerably higher than the CLF rate.2 Under
ordinary circumstances, corporate credit union officials said
that most credit unions would look first to their corporate
credit union to satisfy liquidity needs. The rates that two
corporate credit unions charged their members for non-CLF
loans were also higher than the rate CLF charged. However,
because the corporate credit unions increased the rate they
charged on CLF loans to cover expenses before passing CLF
credit on to their member credit unions, the actual rate paid
by members of the two corporate credit unions for CLF loans
was closer to the rates charged for non-CLF liquidity loans.

Background

The CLF operates out of the offices of NCUA. The staff
consists of four people, two of whom devote part of their time
to their CLF activities. The two senior CLF staff, the
President and Vice President, also serve NCUA as the Deputy
Director, Office of Examination and Insurance, and the
Director of Risk Management, Office of Examination and
Insurance, respectively. According to CLF officials, CLF has
successfully functioned with this level of resources for at
least two reasons. First, since it was established in 1979,
CLF has experienced long dormant periods, in some cases
lasting years, when it made no loans. Second, when CLF does
become active, employees of the corporate credit unions and
U.S. Central Credit Union do much of the staff work.3

During the months leading up to the Year 2000 date change,
there was a great deal of uncertainty regarding the amount of
liquidity that might be needed as a result of both expected
and unforeseen problems that could arise. Most financial
institutions were preparing for an unprecedented, yet unknown,
Year 2000 event. Federal agencies responsible for financial
institutions were asked to develop contingency plans to meet
possible Year 2000 problems because of the concern that Year
2000 problems might adversely affect financial institutions'
ability to use their computer systems. Even if real systems
problems did not arise, there was concern that depositors
would withdraw substantial amounts of money for safekeeping.
To instill confidence in the credit union system, CLF
undertook several initiatives to calm the fears of both credit
unions and their members that adequate liquidity might not be
available when needed. In part, this was accomplished by CLF
having a substantial amount of cash on hand and mechanisms in
place to expedite the delivery of funds to credit unions with
liquidity needs.

In anticipation of potential demand for liquidity due to the
Year 2000 date change, Congress removed the appropriations cap
on CLF borrowings.4 Before that removal, the limit on CLF
borrowing for the purposes of making new loans to credit
unions had been $600 million. The borrowing cap was removed so
that CLF could provide more backup liquidity to credit unions,
if such a need arose. In preparation for the Year 2000, CLF
borrowed $1 billion from the Federal Financing Bank (FFB).5
FFB is an entity within the U.S. Department of the Treasury
that is charged with lending Treasury funds to certain
agencies of the federal government. Although CLF funded the
majority of its loans with its own cash on hand, between
December 27 and 29, 1999, it used $49.1 million of the funds
borrowed from FFB. After borrowing $1 billion from FFB, CLF
had the authority to borrow an additional $20 billion
(approximately) to fund loans to credit unions, if it had
become necessary.6

CLF and NCUA implemented expedited Year 2000 lending
procedures in order to respond to any potential Year 2000
liquidity demand. The procedural changes included (1)
delegating lending authority to the CLF President without
previous approval from the NCUA Board; (2) limiting the loan
period to 1 business day or overnight and allowing the
borrower to roll over the loan amount for as many days as
needed; and (3) determining that, during the months preceding
the Year 2000 date change, any healthy, solvent credit union
with a liquidity need would be eligible for a loan from CLF.
CLF stated that the procedures were designed to enhance CLF's
ability to effectively respond to credit unions' liquidity
demands resulting from anticipated or real effects of the Year
2000 date change. The procedures remained in effect until
March 31, 2000.

Scope and Methodology

To analyze CLF lending, we reviewed CLF's loan activity from
October through December, 1999. Specifically, we reviewed
liquidity need loan applications (LNLA), agents' (corporate
credit unions) request for funds, and CLF's loan
confirmations. We interviewed officials from NCUA, CLF, U.S.
Central Credit Union, the Association of Corporate Credit
Unions, the Credit Union National Association, the National
Association of State Credit Union Supervisors, and the
National Association of Federal Credit Unions. We also
interviewed officials from the 2 corporate credit unions that
obtained 127 loans on behalf of their credit unionsFirst
Carolina Corporate Credit Union and Northwest Corporate Credit
Union. To obtain information on credit unions' access to the
Federal Reserve's discount window, we interviewed Federal
Reserve officials and relied on data they provided on discount
window borrowing from October 1999 to March 2000.

We requested comments on a draft of this letter from NCUA. Its
comments are discussed near the end of this letter. We did our
work in Washington, D.C., and Overland Park, KS, between April
2000 and May 2000 in accordance with generally accepted
government auditing standards.

Overview of CLF Lending and Credit Unions' Demand for Loans
Before the Year 2000 Date Change

Credit unions' demand for liquidity increased from October
through December, 1999. Credit unions needed additional
liquidity for various reasons. However, in most cases the
corporates, not credit unions, made the decision about whether
to borrow from CLF.

CLF Loans

There were 157 CLF loans made to credit unions during the
October through December, 1999, Year 2000 preparation period.7
Of the loans made, 149 were made directly from CLF to U.S.
Central-the agent group representative. U.S. Central then lent
the money to corporate credit unions, acting as agents for
their member credit unions, which, in turn, lent the money to
member credit unions. Eight of the 157 loans were made to
underlying borrowers (credit unions) without going through
U.S. Central. Five of those loans were made directly through
one corporate credit union, and three of the loans were made
by CLF to a credit union that was a direct member of CLF,
rather than through a corporate credit union.8 Of the 154
loans made through corporate credit unions, 127, or 82
percent, were made by the 2 corporates that were the heaviest
users76 loans by First Carolina Corporate Credit Union and 51
loans by Northwest Corporate Credit Union.

Ninety-six percent of the 157 loans (151 in total) were
borrowed on an overnight basis. Four percent of the loans were
for a longer duration, ranging from 14 days to 118 days. 9
Those longer term loans were the ones that CLF either lent
directly to a corporate credit union (without going through
U.S. Central) or directly to the credit union member. CLF
officials said that the longer term loans were approved on a
case-by-case basis and for specific reasons. For instance, CLF
officials said that the corporate credit union that received
the longest term loan requested such a loan because that
corporate was (1) smaller than some of its members and (2)
wanted to ensure that it had adequate liquidity to meet its
members' needs without having to continuously roll the loan
over each business day for a 3-month period.

Although the aggregate amount of CLF lending totaled about
$666 million, the largest amount outstanding on any given day
during this period was about $159 million. There were a few
days in November when the amount outstanding reached $71
million, but most of the time the amount outstanding was no
higher than $41 million, $40 million of which consisted of one
large long-term loan. The days with the highest dollar amounts
outstanding occurred between December 27 and 29, 1999. For
detailed information on CLF's daily loans outstanding, see
enclosure 1.

Nature of the Loans

Corporate credit union officials told us that corporate credit
unions, not member credit unions, made the decision to access
CLF on the basis of their own internal needs.10 Of the 35
corporate credit unions that currently exist, 14 obtained CLF
loans on behalf of their members, although some of these
corporate credit union officials said they could have funded
the liquidity demands of their members out of their own
balances or by borrowing from U.S. Central. Officials from
corporate credit unions that did not obtain loans from CLF
told their trade association that (1) they chose not to
because they thought they could fund member loans from their
own liquidity or (2) they did not see enough of a loan demand
from their members to warrant accessing CLF. Corporate credit
unions that did obtain CLF loans did so for various reasons.
For instance, officials from one corporate credit union said
it obtained a CLF loan to run a test to ensure that everything
ran smoothly through U.S. Central. Another corporate credit
union planned to fund large credit union loan needs of members
that requested secured demand loans through CLF, but not those
with preexisting committed or guaranteed lines of credit.11
Other reasons given by corporate credit union officials for
accessing CLF included (1) a desire to maintain liquidity
reserves internally to cover any higher-than-normal settlement
activity during that period and (2) a decision to fund loans
that were longer term in nature with CLF borrowings.

Corporate credit unions obtained loans on behalf of 37 credit
unions between October 1 and December 31, 1999. Corporate
credit union officials that we talked to, substantiated by the
LNLAs and other documents that we reviewed, indicated that CLF
funds were accessed to meet credit unions' liquidity needs
relating to (1) heavy mortgage lending earlier in the year
that put a credit union in a tight liquidity situation
throughout the second half of the year, (2) an anticipated
drop in member deposits, (3) heavy year-end outflows of cash
related to business activity, and (4) withdrawals relating to
Year 2000 or other emergency situations.

There were two credit unions that each obtained a loan in the
amount of $40 million. One credit union was a member of the
corporate credit union that obtained loans directly from CLF
to ensure that its member's forecasted liquidity needs did not
overwhelm the corporate credit union. This loan was for 118
days and because of its long term was the primary reason that
the daily amount of loans outstanding was mostly around $41
million throughout the October through December time frame.12
The other credit union that obtained a $40 million loan did so
on an overnight basis. Corporate credit union officials said
that this credit union needed to increase cash in the branch
vaults and fund mortgage lending. The credit union normally
would have sold U.S. Treasury securities to generate funds,
but with the sharp increase in rates during that time, it was
not cost-effective to do so.

CLF is not permitted by law to make loans to credit unions for
the purposes of expanding their portfolios. CLF officials said
that all of the lending that took place preparing for 2000 was
solely for liquidity purposes and was not used by credit
unions to expand their portfolios. However, documents and
interviews showed that some liquidity needs met by CLF loans
existed because of previous business expansion. For example,
U.S. Central and corporate credit union officials told us that
some credit unions experienced liquidity needs that were met
by CLF loans because they had successfully completed a "loan
sale" or other expansion in lending activity. We did not see
any indication, however, that a credit union borrowed from CLF
for the purpose of subsequently investing relatively cheap CLF-
provided funds in a higher earning asset.13

Other Sources of Liquidity and the Cost of Borrowing

Credit unions' primary source of short-term liquidity is their
corporate credit union. Under ordinary circumstances, a
corporate credit union that did not have sufficient liquidity
to meet the needs of its member credit unions would look first
to U.S. Central as a source for borrowing. Other routine
sources of liquidity also exist for some credit unions, often
with their corporate's assistance. For example, some credit
unions enter into arrangements to sell a portion of their own
assets with an agreement to repurchase them at a specified
date in the future. During this period, NCUA provided
information to credit unions about the increased availability
of CLF to inform them about CLF as they formulated plans to
deal with Year 2000-related liquidity needs. However,
corporate credit unions and CLF were not the only sources of
liquidity for some credit unions. Both the Federal Reserve's
discount window and Federal Home Loan Bank advances (loans)
are available to credit unions that meet certain eligibility
requirements.14

Some Credit Unions Borrowed From

the Federal Reserve's Discount Window

Since 1980, the Federal Reserve's discount window has been
available to all depository institutions, including credit
unions, that maintain reservable transaction accounts or
nonpersonal time deposits (as defined by the Federal Reserve's
Regulation D). All such institutions are entitled to the same
discount window borrowing privileges as Federal Reserve member
banks. According to NCUA, as of March 27, 2000, 61 percent of
credit unions, holding more than 96 percent of total industry
assets, are eligible to borrow from the discount window. This
is up from about 58 percent in February 1999. However, credit
unions as a whole generally do not use the discount window
extensively.

Industry and regulatory officials said that they believe there
are several reasons why credit unions might not make use of
the discount window. These reasons include (1) the perception
of credit union officials that the Federal Reserve does not
want large numbers of credit unions coming to the discount
window, (2) their understanding that financial institutions
are legally required to provide checking accounts in order to
be eligible to borrow, (3) the increased level of comfort that
some credit unions feel when obtaining liquidity within their
own credit union community, and (4) a belief that the cost of
borrowing from the discount window is higher than through
other sources.

Overall, 25 credit unions borrowed from the Federal Reserve's
discount window between October and December, 1999.15 Three
credit unions obtained loans both from CLF and the Federal
Reserve's discount window. The aggregate dollar value of the
discount window loans was about $771.6 million, and the
highest single-day total outstanding was about $36 million.
(See enc. 2.) While it would appear that this exceeds the
aggregate total of CLF lending during the period, the two
figures are not comparable because of procedural and
methodological differences in how they are calculated. If all
CLF loans had been overnight loans, rolled over for as many
days as the loans were outstanding, aggregate lending for CLF
would have exceeded the comparable figure for discount window
borrowing. 16

The discount window could be accessed indirectly by those
credit unions that are not now eligible, even the smallest.
Corporate credit unions could borrow from the discount window
on behalf of their members just as they now access CLF.
Corporate credit union officials said that to obtain access to
the discount window they would have to (1) give up their
banker's bank exemption and (2) maintain reserves, which they
said could be costly.17 However, the largest corporate credit
union, which has given up its banker's bank exemption for
business reasons unrelated to the discount window, told us
that its cost of maintaining reserves was between $0.5 to $1.5
million annually between 1997 and 1999.18 If, as has been
proposed in HR 4209, the Federal Reserve were to pay interest
on deposited reserves, it would become less expensive for
corporate credit unions to give up their bankers' bank
exemption.

The Cost of Borrowing From CLF
Compared to Other Available Sources

The interest rate that CLF charged on its loans ranged between
5.24 and 5.68 percent. Before November 12, 1999, when CLF
received its first loan from the Federal Financing Bank, this
rate was determined by CLF's cost of funds.19 From November
12th, the CLF rate was equal to the average rate charged by
FFB on its outstanding loans to CLF.20 Enclosure 3 shows that
between October and December, 1999, this rate was comparable
to the federal funds rate, that is, the rate banks charge
other banks for overnight liquidity. However, the enclosure
also shows that the rate charged by the Federal Reserve
discount window on adjustment credit loans was lower than the
CLF rate throughout the period.21 The rate for SLF credit
loans, however, was higher than the CLF rate.

The rate charged by CLF might not be the rate paid by the
credit union that ultimately receives the loan. In most cases,
the CLF loan is obtained through the credit union's corporate
credit union. The corporate consolidates the loan requests
from its members and sends an Agent's Request for Funds (ARF)
to U.S. Central. U.S. Central then makes a single application
to CLF that consolidates all of the ARFs received from
corporates that day. Once approved, CLF makes a single loan to
U.S. Central, which then makes loans to each of the corporate
credit unions that submitted an ARF. The corporate credit
unions then make a loan to each of its members in the amounts
previously determined. An official at U.S. Central told us
that the rate they charged the corporate credit unions was
exactly equal to the rate they were charged by CLF. However,
the corporate credit unions may increase the rate to cover
their administrative expenses.

Because every corporate credit union establishes its own
criteria for setting the rates that it charges its members for
loans, rates are likely to vary among them. First Carolina
Corporate Credit Union and Northwest Corporate Credit Union
each normally have a variety of rates available for ordinary
overnight loans used by their members, depending on certain
factors, such as the type of collateral and whether a
preapproved line of credit had been established. During
October through December, 1999, both corporates also
established a rate to be charged on CLF loans that they
provided to their members.22

Enclosures 4 and 5 compare the rate charged by CLF with two
rates charged by each of the two corporate credit
unions-first, with the rate charged to credit unions that
received CLF loans and, second, with the next lowest overnight
rate charged to non-CLF borrowers. The same general pattern
emerges from both corporate credit unions. The rate charged by
CLF was generally lower than either of the rates charged by
the corporates.23 The rate charged to non-CLF borrowers was
generally between one-half and nine-tenths of 1 percent higher
than the CLF rate. Moreover, the rate charged to those
receiving CLF loans was usually somewhat lower than the rate
available to non-CLF borrowers. Although the spread (or
difference) between these two rates varied, it was generally
smallabout one-quarter of 1 percent.

Conclusions

Concerns about potential liquidity crises at financial
institutions related to the Year 2000 date change were
widespread. Although the potential negative consequences were
not realized, there was an increase in CLF lending from
October through December,1999. According to CLF officials, CLF
loans were made to solvent credit unions that needed
liquidity. Moreover, they said the lending was done without
any financial stress to CLF. It is reasonable to assume that
the availability of CLF credit did provide a measure of calm
to the credit union system amidst Year 2000 uncertainty. In
retrospect, however, whether the CLF lending that actually
took place provided liquidity unavailable elsewhere is
questionable. Although corporate credit union officials said
they were glad CLF lending was available, some officials said
that they could have funded all of the lending during that
time either out of their own balances or by borrowing from
U.S. Central.

CLF officials said that, in accordance with the statute, all
CLF loans were done for the purpose of meeting credit unions'
liquidity needs and not for the purpose of expanding credit
unions' portfolios. We found no indication in our work or in
the documents we reviewed that any credit union receiving CLF
funds borrowed those funds for the purpose of engaging in
arbitrage either to increase earnings or expand new business.
However, it is more difficult to identify whether a liquidity
need resulted from unexpected events that were outside the
control of the credit union or as a result of normal business
decisions and needs, including business growth. Credit unions
grow to provide more and better services to their members. By
doing so, they may experience short-term liquidity needs. When
this happened to an eligible credit union during the October-
to-December period, CLF was willing to provide a loan.
Whatever the specific purpose for which money is borrowed, it
may, in effect, enable a credit union to expand its business.

Some credit unions borrowed from the Federal Reserve's
discount window. Those that used the normal type of discount
window credit, adjustment credit, actually paid a lower rate
than the rate available from CLF. This differential was even
larger when the discount window rate is compared with the
rates charged credit unions by their corporate credit unions
for CLF loans.

Agency Comments

We requested comments on a draft of this letter from the
Chairman, NCUA. NCUA provided written comments that are
included in enclosure 6.24 NCUA disagreed with our draft
conclusions. We had previously stated that it was difficult to
determine whether CLF lending filled an important gap during
the period before the Year 2000 date change. NCUA disagreed
with that point and stated that it had filled an important gap
both before and during the Year 2000 date change, in part
because of the calming effect that CLF and other measures
undertaken by NCUA had on depositor confidence. We have added
information to the letter and to our conclusion that
elaborated on the circumstances leading up to the Year 2000
event and CLF's role during that time. It is reasonable to
believe that the role played by NCUA and CLF did serve to
strengthen public confidence in credit unions' ability to
respond to potential Year-2000 problems. However, in
retrospect, it is not apparent that the liquidity actually
provided to the system by CLF would have been unavailable
elsewhere.

NCUA disagreed with our conclusion that CLF borrowing by
credit unions before the Year 2000 date change, in some cases,
facilitated the expansion of their portfolios. We had
previously stated that it was difficult to know whether a
liquidity need resulted from unexpected events that were
outside the control of the credit union or as a result of
normal business decisions and needs, including business
growth. We understand NCUA's position that none of CLF's loans
during that period were subsequently used by credit unions for
expansion purposes, as defined by NCUA. NCUA guidance on this
point says ".that the liquidity loan cannot be used to fund
new investments or new loan product offerings." Our point was
that some credit unions had liquidity needs because they had
previously expanded their businesses, for instance, by
increasing loans to their members, which resulted in them
having a need for liquidity that was satisfied by a loan from
CLF during this period. Additionally, to the extent that CLF
makes long-term loans (either multi-day loans or one-day loans
rolled over for several days), it becomes more difficult to
monitor the precise use of the funds. In response to NCUA's
comments, we have stated clearly in the letter and in our
conclusion that we identified no case where CLF loan proceeds
were used to expand business within the narrow definition used
by NCUA. However, from a broader perspective, money was
clearly lent to meet liquidity needs in some credit unions
that resulted from a previous expansion of business activity.

NCUA also expressed concern with an implication that they drew
from our third conclusion. We observed that credit unions
borrowing from the Federal Reserve's discount window paid a
lower rate than the rate available from CLF. This was a
factual statement of the relationship between rates from CLF
and the discount window during this period. At another time,
that relationship may not hold true. We recognized that CLF
does not control the rate it charges for loans. The point of
our discussion was that some credit unions had alternatives to
borrowing from CLF, and that, in at least one case during this
period, the alternative was cheaper. As a result, credit
unions that are eligible to borrow from other sources such as
the discount window or FHLB, may find it useful to compare
available rates when they have liquidity needs.

We will send copies of this letter to Representative James
Walsh, Chairman, and Representative Alan Mollohan, Ranking
Minority Member, House Committee on Veterans Affairs, HUD, and
Independent Agencies; Representative Bruce Vento, Ranking
Minority Member, House Committee on Financial Institutions and
Consumer Credit; and the Honorable Norman E. D'Amours,
Chairman, NCUA. We will also make copies available to others
upon request.

Please contact me or Lawrence D. Cluff on (202) 512-8678 if
you or your staff have any questions. Tamara Cross was a major
contributor to this letter.

Thomas J. McCool
Director, Financial Institutions
 and Markets Issues

_______________________________
1 Corporate credit unions are cooperatively owned by their
member credit unions and serve their members by either lending
to them or investing their excess funds.
2 During this period, the Federal Reserve lent $462.3 million
to credit unions as adjustment credit and $309.3 million as
SLF credit. Two credit unions borrowed $42 million in seasonal
credit during this same period. These seasonal loans were not
included in the analysis. Moreover, in the data provided to
us, the Federal Reserve did not include information on loans
that it identified as "test loans," which are defined as very
short-term loans in amounts between approximately $1,000 and
$10,000.
3 U.S. Central is a corporate credit union that is owned
jointly by all of the other corporate credit unions. Along
with other services that it provides its owners, U.S. Central
is the CLF agent group representative for most corporate
credit unions and obtains loans from CLF on their behalf.
4 When a CLF member has a liquidity need due to unanticipated
cash flows, it may seek a loan from CLF. Under the National
Credit Union Central Liquidity Facility Act, CLF is authorized
to borrow from any source 12 times its subscribed capital
stock and surplus, which according to NCUA is currently $21
billion.
5 On November 12, 1999, CLF borrowed $200 million from FFB.
Between November 12 and December 1, 1999, CLF borrowed an
additional $200 million four times, thereby reaching a total
of $1 billion in borrowed funds. These loans were rolled over
weekly until paid off in early January 2000. CLF officials
stated that FFB was not set up to easily provide significant
amounts of funding on a short-term basis, which would have
prevented CLF from obtaining overnight loans to meet potential
liquidity demands. As a result, CLF decided to borrow $1
billion from FFB and roll the amount over until after the Year
2000 date change to maintain a store of cash on hand.
6 At year-end 1999, CLF had paid-in capital stock of $881
million. This constituted one-half of the subscribed capital
stock of CLF. The remainder of the capital stock was held in
callable accounts at the member credit unions or their agents
(the corporates). With total capital stock of approximately
$1.76 billion, the CLF's statutory limit on total borrowing
would be about $21 billion.
7 The 157 loans were loans involving CLF-provided funds. CLF
made 34 loans to U.S. Central, 3 loans to a regular member
credit union, and 2 loans directly to a corporate credit
unionall of which were for 157 underlying borrowers or credit
unions.
8 Most credit unions access CLF through their corporate credit
union, which acts as an agent for its members. However, some
credit unions, referred to as regular member credit unions,
have joined CLF directly and have direct access to CLF lending
when necessary.
9 Four of the corporate credit unions' loans were for 87 days,
and one loan was for 118 days. One of the loans to the regular
member credit union was for 14 days, and the other two were
overnight loans.
10 Corporate credit unions did not make the decision on behalf
of the credit union that borrowed directly from CLF.
11 Corporate credit union officials told us that most loans
made by corporate credit unions to their members are to be
secured, although corporate credit unions do, in some cases,
offer unsecured loans to their members. Committed or
guaranteed lines of credit are lines of credit that are set up
in advance and operate similar to an overdraft line of credit
for an individual. A secured (or demand) loan refers to a
situation in which a credit union approaches its corporate
credit union for a loan without having a previously approved
borrowing arrangement.
12 This same credit union received a second $40 million loan
for liquidity needs from funds loaned by CLF to its corporate
credit union. This loan took place after the expiration of the
expedited procedures used during the Year 2000 date change
period. On May 16, 2000, CLF made a loan of $40 million to the
corporate on behalf of the member credit union. Of this
amount, just over $30 million was to repay loans previously
made by the corporate to the credit union, and the remainder
went to the credit union to fund ongoing liquidity needs. The
term of the loan was 90 days.
13 CLF officials told us that they are very alert for this sort
of arbitrage activity. In their opinion, the most likely
situation in which this activity might be found would be in
longer term loans made by CLF. As a result, they told us that
all longer term loans during this period received close and
ongoing scrutiny.
14 In the time available to us, we were unable to determine the
extent to which credit unions used the Federal Home Loan Banks
as a source of liquidity funding during this period. However,
we received information that suggested such borrowing was
growing. Credit unions' ability to borrow from the Federal
Home Loan Banks increased with the passage of the Gramm,
Leach, Bliley Act (P.L. 106-102) in 1999.
15 The Federal Reserve's discount window offered several
categories of short-term credit, including adjustment credit;
seasonal credit; and SLF credit, a special category used in
advance of the Year 2000. These 25 credit unions borrowed
either adjustment credit or SLF credit, or both. Two other
credit unions had arranged to borrow seasonal credit during
this same period.
16 The Federal Reserve discount window only makes overnight
loans. Thus, every loan is counted every day both for the
purposes of aggregating the total lending over the period and
for calculating the daily loan balance outstanding. Most, but
not all of CLF's loans were overnight. A few were for periods
extending from 14 to 118 days. While these longer term loans
counted every day toward the CLF's daily loan balance
outstanding, they only counted once toward the aggregate
amount of CLF lending.
17 Banker's banks are owned by financial institutions with
which they do business and do not engage in business with the
public. These institutions are not required to maintain
reserves under Regulation D and do not have access to the
discount window. However, federal reserve officials said that
the Board of Governors of the Federal Reserve has determined
that a banker's bank may obtain access to the discount window
if it voluntarily undertakes to maintain reserves.
18 We have no information on what it might cost other corporate
credit unions to give up their bankers' bank exemptions.
19 CLF officials told us that CLF's cost of funds before
November 12 was set at the rate paid to CLF on its
transactions account at U.S. Central.
20 CLF's borrowing agreement with FFB requires that, in
addition to the interest charged on CLF's borrowing, CLF must
also remit to FFB any additional interest earned by lending
FFB's funds. CLF's rate on borrowings from FFB equals the 91-
day Treasury rate plus one-quarter of 1 percent. In light of
the FFB requirement, CLF set its rate on liquidity loans at
exactly the rate charged by FFB.
21 Although the majority of the funds borrowed by credit unions
during this period were adjustment credits, and thus paid the
lowest available rate, it should be pointed out that
adjustment credit is an administered borrowing program, with a
requirement that the borrower first look to other sources of
funds, and has restrictions on the use of the proceeds. As a
result, it is not as freely available as other types of
discount window loans.
22 The information presented about rates charged by First
Carolina and Northwest may not be representative of all
corporate credit unions that used CLF to provide liquidity to
their members during the period.
23 Both First Carolina rates dipped below the CLF rate in the
last few days of December 1999. This is probably attributable
to First Carolina's practice of basing its rates on its
overall cost of funds, of which fed funds is a major
component. During the last few days of December, the fed funds
rate fell from about 5.5 percent to less than 4.0 percent.
24 In addition to the letter from NCUA, which is included in
its entirety in enclosure 6, NCUA attached a copy of a letter
sent to Chairman Leach on February 23, 1999, responding to
points raised by Treasury Secretary Rubin in a letter to
Chairman Leach dated January 11, 1999. Because of its length,
we are not including the February letter in this letter. A
copy of the letter can be obtained by contacting NCUA.

Enclosure 1
Total Daily CLF Loans Outstanding
Page 13GAO/GGD-00-143R CLF Lending to Credit Union
s Before Year 2000 Date Change

Source:  GAO analysis of CLF data.

Enclosure 2
Total Daily Discount Window Loans Outstanding to
Credit Unions
Page 14GAO/GGD-00-143R CLF Lending to Credit Union
s Before Year 2000 Date Change

Source:  GAO analysis of Federal Reserve Board
data.

Enclosure 3
Rate Comparison CLF, Federal Funds, and FRB
Discount Window Rates
Page 15GAO/GGD-00-143R CLF Lending to Credit Union
s Before Year 2000 Date Change

Source:  The Federal Reserve Board and CLF

Enclosure 4
Rate Comparison--First Carolina Corporate and CLF
Page 16GAO/GGD-00-143R CLF Lending to Credit Union
s Before Year 2000 Date Change

Source:  First Carolina Corporate Credit Union and
CLF

Enclosure 5
Rate Comparison--Northwest Corporate and CLF
Page 17GAO/GGD-00-143R CLF Lending to Credit Union
s Before Year 2000 Date Change

Source:  Northwest Corporate Credit Union and CLF

Enclosure 6
Comments from NCUA
Page 23GAO/GGD-00-143R CLF Lending to Credit Union
s Before Year 2000 Date Change

*** End of Document ***