United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/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 periodin 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
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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 twothirds 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 credithad 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 nonCLF 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.

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.
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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)

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.
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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

unionsFirst 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

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 unionall of which were for 157 underlying borrowers or credit unions.
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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 users76 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.

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.
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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

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.
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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.

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.
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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

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.
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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 smallabout one-quarter of 1 percent.

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.
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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

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.
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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.
B-285159

Page 12 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change

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
Enclosure 1

Total Daily CLF Loans Outstanding

Page 13 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change

Source: GAO analysis of CLF data.
Enclosure 2

Total Daily Discount Window Loans

Outstanding to Credit Unions

Page 14 GAO/GGD-00-143R CLF Lending to Credit Unions 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 15 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change

Source: The Federal Reserve Board and CLF
Enclosure 4

Rate Comparison--First Carolina Corporate

and CLF

Page 16 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change

Source: First Carolina Corporate Credit Union and CLF
Enclosure 5

Rate Comparison--Northwest Corporate and

CLF

Page 17 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change

Source: Northwest Corporate Credit Union and CLF
Enclosure 6

Comments from NCUA

Page 18 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Enclosure 6

Comments from NCUA

Page 19 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Enclosure 6

Comments from NCUA

Page 20 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Enclosure 6

Comments from NCUA

Page 21 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Enclosure 6

Comments from NCUA

Page 22 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Enclosure 6

Comments from NCUA

Page 23 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Page 24 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
Page 25 GAO/GGD-00-143R CLF Lending to Credit Unions Before Year 2000 Date Change
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