Contingency planning and Credit Unions : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Double whammy: Credit unions have success on two liquidity fronts


CU Times Associate Editor

ALEXANDRIA, Va.-NCUA and the credit union trade groups have been pushing for close to a year for Congress to lift the $600 million cap on the Central Liquidity Facility. They more than got their wish. In a span of just five days, Congress and financial regulators each did their part to shore up backup liquidity sources for credit unions.

On May 24, President Clinton signed H.R. 1141, the Supplemental Appropriations Conference Report bill, into law. The bill contains a provision that lifts the cap on the CLF, increasing it to its maximum statutory limit, which was about $20.7 billion at press time.

Just five days later, in a rare arrangement, U.S. Central, NCUA and the Federal Reserve Bank of Kansas announced a special Year 2000 liquidity agreement that would provide another liquidity source for credit unions.

U.S. Central was granted a separate state charter by Kansas regulators to form U.S. Central Liquidity Credit Union, a wholesale corporate credit union, which it can use to access the Fed's discount window. The new institution will be run by U.S. Central's board of directors and staff, and it falls under the supervision of Kansas regulators, not NCUA.

If liquidity is needed beyond the CLF, the new source would work this way. The Federal Reserve Bank of Kansas would make a secured loan to the newly chartered U.S. Central Liquidity Credit Union. U.S. Central Liquidity Credit Union would funnel the money to U.S. Central which could then pass it on to the nation's 36 corporates, which could then funnel it to natural person credit unions.

"We are pleased to have the Fed's participation as a lender of last resort for Year 2000 liquidity," said U.S. Central CEO Dan Kampen. "While we are confident in our liquidity sources, especially with the raising of the CLF cap, it offers additional assurance that the credit union industry is well prepared for any funding needs arising from the Year 2000 date change."

There's no exact dollar amount set for how much corporates could borrow from the Fed's discount window under this arrangement, but according to David Dickens, senior vice president of asset liability management for U.S. Central, it is well into the billions, anywhere from $20 to $40 billion.

Dickens said instead of the Fed having to open its discount window to 500 or 5,000 credit unions, this system allows the Fed to open it up to just one institution and let the corporate system, already in place, handle getting the money to natural person credit unions.

The reason corporates can't access the Fed's discount window is because they are "Bankers' Banks", which means they don't take deposits or make loans to the public. The Fed did not want to change the whole practice of providing Bankers' Banks access to its discount window, so this deal was worked out.

With Congress successfully raising the borrowing cap on the CLF to its statutory limit and this latest move involving U.S. Central, both amounting to billions of dollars of available liquidity, is the wrong message being sent about credit unions' Y2K preparedness?

"In the last couple of weeks we have secured enough liquidity sources to handle any problems," said Herb Yolles, president of the CLF, who has been pushing for Congress to lift the CLF cap since 1994.

"I'm sure some people might wonder why credit unions now have two backup liquidity sources, when we don't expect any liquidity problems," said Yolles.

But Yolles said the back-to-back liquidity announcements were pure coincidence. Yolles said NCUA had been working with the Fed for over a year on a backup liquidity source that involved the Fed's discount window, while simultaneously asking Congress to lift the CLF cap.

"In the event Congress didn't lift the cap we wanted another plan in place. Basically, you are seeing the result of two liquidity avenues being worked simultaneously," said Yolles.

"There were no plans to announce these so close together. They were two separate ways for approaching the liquidity problem. Frankly we didn't think Congress would be able to lift the CLF cap with the appropriations bill. We're very fortunate how this all worked out," said Bob Loftus, director of public and congressional affairs for NCUA.

Yolles stressed that these recent liquidity successes don't mean that credit unions can get lax on their liquidity planning. "They're not meant as crutches, just backup sources that we don't expect to be used," said Yolles.

CUNA's vice president of legislative affairs, John McKechnie, said the lobbying focus now shifts to getting Y2K liability legislation passed that would limit the number of frivolous lawsuits stemming from Y2K.

"Y2K is a three-legged stool. The first part is technology, then liquidity and now liability is up. We hope the House's version of Y2K liability (H.R. 775) legislation gets more support," said McKechnie.


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-- (, June 02, 1999

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