The $2.0 billion in credit union equity funds previously in the Central Liquidity Facility (CLF) have disappeared. The December 2012 KMPG audit shows that $2.0 billion of credit union capital stock was redeemed. However, there is no word in the audit nor comment from NCUA about where these credit union funds, previously held in safe, short-term investments, are today.
Credit Unions' Equity
The CLF is “a mixed-ownership government corporation” managed by the NCUA, but whose equity is provided solely by credit unions. As stated in NCUA’s August 2012 FAQ’s on the CLF, such funds belong to member credit unions.
This ownership is established in the CLF statute and is implemented through direct stock purchase and agent equity purchases on behalf of credit unions.
A credit union or group of credit unions primarily serving other credit unions, such as a corporate credit union, may also purchase stock on behalf of all of its natural person credit union members (agent members). Under the agent group arrangement, the agent group representation acquires and holds the stock for natural person credit unions. — “Your Credit Union’s Contingent Liquidity and the Central Liquidity Facility Frequently Asked Questions,” NCUA, August 2012.
The Vital Role Of The CLF
This $2.0 billion belongs to natural person credit unions and provides the core equity to leverage the CLF’s statutory borrowing authority from the Federal Financing Bank. By unilaterally withdrawing these funds, the NCUA board has reduced this vital source of emergency liquidity from $49.8 billion one year ago to just $2.3 billion today (audit footnote 10).
This essential pillar of system soundness and lender of unfailing reliability has had its core lending capability minimized, just a few short years after achieving its highest drawings ever. According to the FAQ’s, in March 2009, total CLF lending peaked at $19.2 billion.
A System Without Cooperative Solutions
According to NCUA’s FAQ’s, the CLF was the primary resource for credit union emergency liquidity.
The bulk of the credit union industry has no emergency backup liquidity source beyond indirect CLF membership. Only 1.3% of federally insured credit unions — representing 3.4% of total FICU assets —belong directly to the CLF. Additionally, 5.9% of federally insured credit unions — representing 44.1% of FICU assets — have filed an application to access the Federal Reserve Discount Window. — “Your Credit Union’s Contingent Liquidity and the Central Liquidity Facility Frequently Asked Questions,” NCUA, August 2012.
This "defunding" has left the cooperative system weaker and more vulnerable. It reduces NCUA’s future regulatory options. Credit union liquidity is now at the mercy of the same institutions that froze during the last crisis.
Individually, credit unions today are indeed stronger than they were before, but the cooperative system is critically weaker.
Restoring The System’s Liquidity Pillar
The CLF did not fail and it has had no losses. The $2.0 billion equity is intact — somewhere. NCUA admits that the CLF’s capabilities and role may not be widely grasped.
The Central Liquidity Facility (CLF) is a special NCUA-operated lending facility for the credit union industry. Currently, whether aware of it or not, approximately 6,019 federally insured credit unions have indirect access to the CLF. The CLF can serve as a 100% reliable emergency liquidity backstop source for member credit unions in the event of a financial crisis. — “Your Credit Union’s Contingent Liquidity and the Central Liquidity Facility Frequently Asked Questions,” NCUA, August 2012.
However, this lack of awareness places an even greater responsibility on NCUA leaders for reconnecting the CLF and its capabilities with the credit unions whose equity it holds. Just as importantly, this redesign is an opportunity for NCUA to regain the confidence of the credit union system by demonstrating that it is open to working with the industry to create new operational and governance solutions absent U.S. Central.
A Test Of Leadership
Hopefully, the funds removed by the NCUA board are in safekeeping — somewhere. The CLF’s creation in 1977 was the final pillar for the cooperative system’s ability to operate safely and autonomously from dependence on financial competitors.
It took years of public discussion, proposals, and negotiations to develop this unique partnership with the CLF, corporate, and credit union owners. This cooperative system solution worked. Through economic downturns, Y2K uncertainty, and the aftermath of the 9/11 terrorist attacks, there was never a concern about system liquidity. Even during the worst years of the financial crisis (2008-2009) credit unions recorded the two greatest years of back-to-back loan originations, totaling over $525 billion. Confidence was maintained and lending to members continued while much of the rest of the financial system was in a credit deep freeze.
Restoring these credit union funds to the CLF would be a critical first step in opening up a meaningful dialogue towards a new cooperative design for system liquidity. It would shift the tone of the discussion, clear up any potential misunderstandings and, most importantly, show that Washington can be responsive to the needs of the 90 million member owners who trust their cooperatives to be there, regardless of the time or circumstance.
What You Can Do
Show your support for an open and transparent process for selecting NCUA board members by signing the WhiteHouse.gov We The People petition. Doing so only requires your name, email address and zip code. Names are not published on the petition but you do need to verify your email address by approving a link that will be sent to your email once you register for an account. Then, search for "NCUA" on the petition site linked above and sign the petition "Choose NCUA Leaders Who Understand Cooperatives."