[Federal Register Volume 66, Number 81 (Thursday, April 26, 2001)]
[Notices]
[Pages 21019-21021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10308]


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NATIONAL CREDIT UNION ADMINISTRATION


Central Liquidity Facility

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final Interpretive Ruling and Policy Statement (IRPS) 01-2, 
``Central Liquidity Facility Advance Policy.''

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SUMMARY: This policy statement clarifies the role of the Central 
Liquidity Facility (CLF) and the circumstances when the CLF will 
approve a Regular or Agent Member's request for a CLF advance.

DATES: The IRPS is effective May 29, 2001.

ADDRESSES: National Credit Union Administration, 1775 Duke Street, 
Alexandria, VA 22314-3428.

FOR FURTHER INFORMATION CONTACT: J. Owen Cole, Jr., Vice President, 
CLF, at the above address, or telephone: (703) 518-6360 or Frank S. 
Kressman, Staff Attorney, at the above address, or telephone: (703) 
518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    The CLF operates in accordance with Title III of the Federal Credit 
Union Act (Act) and Part 725 of NCUA's regulations, which implements 
Title III. 12 U.S.C. 1795-1795k; 12 CFR part 725. It was created in 
1979 to improve the general financial stability of the credit union 
industry by helping to meet the liquidity needs of individual credit 
unions. This improved stability encourages savings, supports consumer 
and mortgage lending, and helps provide basic financial resources to 
all segments of the economy. In continuing to fulfill this mission, the 
CLF previously published proposed IRPS 00-2 to clarify its function and 
limitations in an ever-changing financial services environment. 65 FR 
63892, October 25, 2000; 65 FR 65884, November 2, 2000. NCUA has 
received public comments on the proposal and has incorporated some of 
those comments into the IRPS. NCUA has renumbered IRPS 00-2 as 01-2 and 
adopts the below revised IRPS as final. IRPS 01-2 supersedes IRPS 80-4.

B. Summary of Comments

    NCUA received thirteen comment letters regarding the proposed IRPS. 
Six from credit union trade associations, four from corporate credit 
unions, one from a natural person federal credit union, one from a 
banking trade association, and one from an association of state credit 
union supervisors. All of the commenters generally supported the 
proposed IRPS, except for the banking trade association. Some 
commenters offered suggested revisions.
    Seven commenters noted that the proposed IRPS states that a CLF 
loan officer may require a borrowing credit union to prepare a 
liquidity restoration plan to detail the action and time required to 
restore the credit union's net funds position to the point where it is 
no longer dependent on CLF advances. These commenters suggested that 
the IRPS would be more useful if NCUA provided examples of 
circumstances under which a loan officer might require a plan. The loan 
officer's decision to require a plan is greatly dependent on the unique 
circumstances of the borrowing credit union. Factors that may 
contribute to this decision include: (1) The credit union consistently 
provides incomplete, vague, or untimely information needed to approve 
or monitor an advance; (2) the loan officer develops concerns about the 
borrowing credit union's financial condition and ability to repay; (3) 
the credit union appears to have used an advance for inappropriate 
purposes; and (4) the credit union appears to be unreasonably dependent 
on advances without making progress towards implementing programs to 
manage its liquidity risk. These factors are only a few of many that a 
loan officer may consider before requiring a liquidity restoration 
plan. This clarification has been incorporated into the final IRPS.
    Four commenters noted that the proposed IRPS lists examples of 
appropriate circumstances for seeking CLF advances. These commenters 
suggested that NCUA should more clearly indicate that there may also be 
other appropriate circumstances for seeking CLF advances in addition to 
those listed. NCUA acknowledges that the list is meant to be 
illustrative, not exhaustive. NCUA has incorporated this clarification 
into the final IRPS.
    The association of state credit union supervisors suggested that 
NCUA should adopt a policy not to advance funds to a state chartered, 
federally insured credit union without first consulting with the credit 
union's state supervisory authority (SSA). NCUA does not believe this 
is an appropriate action for it to take, but recognizes that an SSA may 
wish to require its regulated credit unions to notify it before making 
application to CLF.
    The banking trade association suggested that NCUA withdraw the IRPS 
and re-issue it as a regulation so that it would have the force of law. 
We note that the IRPS was issued in compliance with the Administrative 
Procedure Act (APA) and has the same force of law as a regulation. 5 
U.S.C. 551. The banking trade association also stated that CLF should 
not provide financial assistance to financially troubled credit unions. 
We agree. CLF is intended only as a liquidity provider and that is how 
it functions. Finally, the banking trade association stated that CLF is 
prohibited from making advances the intent of which is to expand credit 
union portfolios and therefore can not make advances to address an 
unexpected surge of credit demands. We agree that CLF is prohibited 
from making advances the intent of which is to expand credit union 
portfolios, but believe that an unexpected surge of credit demands is a 
legitimate liquidity need for the CLF to meet.

[[Page 21020]]

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact agency rulemaking may have 
on a substantial number of small credit unions. For purposes of this 
analysis, credit unions under $1 million in assets are considered small 
credit unions.
    This final IRPS clarifies the role of the CLF and the circumstances 
when the CLF will approve advances. This final IRPS imposes no 
additional financial, regulatory, or other burden whatsoever on credit 
unions transacting business with the CLF. The NCUA has determined and 
certifies that this final IRPS will not have a significant economic 
impact on a substantial number of small credit unions. Accordingly, the 
NCUA has determined that a Regulatory Flexibility Analysis is not 
required.

Paperwork Reduction Act

    NCUA has determined that this final IRPS does not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on state and local 
interests. In adherence to fundamental federalism principles, NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This final IRPS applies 
to all credit unions doing business with the CLF, but does not have 
substantial direct effect on the states, on the relationship between 
the national government and the states, or on the distribution of power 
and responsibilities among the various levels of government. NCUA has 
determined that this final IRPS does not constitute a policy that has 
federalism implications for purposes of the executive order.

Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final IRPS will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the APA. 5 U.S.C. 551. 
The Office of Management and Budget has determined that this final IRPS 
is not a major rule for purposes of the Small Business Regulatory 
Enforcement Fairness Act of 1996.

    By the National Credit Union Administration Board, on April 19, 
2001.
Becky Baker,
Secretary of the Board.
    For the reasons stated above, IRPS 01-2 is revised to read as 
follows:

    Authority: 12 U.S.C. 1795-1795f.

    2. IRPS 01-2 is revised to read as follows:

Interpretive Ruling And Policy Statement No. 01-2

Central Liquidity Facility Advance Policy

Purpose

    Congress established the Central Liquidity Facility (CLF) in 
1979 and authorized the NCUA Board, acting as the CLF Board, to 
prescribe the manner in which the general business of the CLF is to 
be conducted. The CLF was created to improve the general financial 
stability of the credit union industry by meeting the liquidity 
needs of individual credit unions. This improved stability 
encourages savings, supports consumer and mortgage lending, and 
helps provide basic financial resources to all segments of the 
economy. This policy statement is intended to clarify the role of 
the CLF and the circumstances under which the CLF will approve a 
Regular or Agent Member's request for a CLF advance.

Liquidity Needs

    The liquidity needs of natural person credit unions for which 
CLF advances are appropriate are limited to:
    A. Short-term adjustment credit available to assist in meeting 
temporary requirements for funds or to cushion more persistent 
outflows of funds pending an orderly readjustment of credit union 
assets and liabilities;
    B. Seasonal credit available for longer periods to assist in 
meeting seasonal needs for funds arising from a combination of 
expected patterns of movement in share and deposit accounts and 
loans; and
    C. Protracted adjustment credit available in the event of 
unusual or emergency circumstances of a longer-term nature resulting 
from national, regional or local difficulties.
    Short-term adjustment credit advances generally are available 
for maturity periods of up to 90 days. Seasonal credit advances are 
available for periods of up to 270 days. Seasonal credit is 
generally restricted to institutions that can demonstrate a pattern 
of recurring need. Seasonal credit advance requests must be 
supported by an analysis that includes at least two years of 
detailed seasonal flow of funds data. Protracted adjustment credit 
advances that are available for periods in excess of 270 days are 
only made when exceptional circumstances are adversely affecting an 
individual institution. CLF loan officers exercise considerable 
discretion in extending protracted adjustment credit and may consult 
with NCUA supervisory authorities to address any concerns over the 
credit union's ability to restore liquidity and remain viable. As is 
the case with short-term adjustment credit and seasonal credit, CLF 
may decline a credit union's request for protracted adjustment 
credit for creditworthiness reasons. It may also refer the credit 
union to the appropriate NCUA Regional Director for possible NCUSIF 
special assistance under section 208 of the Act. 12 U.S.C. 1788.

Role of the CLF

    Historically, CLF advances have been intended only to help 
maintain financial stability for credit unions that were 
experiencing liquidity difficulties or expected to experience 
liquidity difficulties in the immediate future. In most instances, 
CLF makes advances when the borrower's primary sources of liquidity 
are inadequate, impracticable or otherwise unavailable at the time 
of need. CLF is prohibited by statute from making an advance the 
intent of which is to expand credit union portfolios. 12 U.S.C. 
1795e(a)(1).
    NCUA acknowledges the need for the CLF to operate in a flexible 
manner. While NCUA recognizes that CLF is not to be considered the 
``lender of last resort,'' NCUA also understands that CLF is not to 
be used as a conventional funding facility or standard market 
alternative for borrowing credit unions. Rather, NCUA's long-
standing position is that the CLF was established to be used 
sparingly as a stabilizing agent in times when liquidity needs 
threaten to disrupt credit unions' ability to provide basic 
financial resources to their members. Accordingly, NCUA's long-held 
policy that the CLF is a backup liquidity provider remains 
unchanged.
    Although CLF advances are available when appropriate, NCUA 
emphasizes the importance of liquidity planning and contingency 
funding. NCUA expects credit unions to have in place adequate 
programs and procedures to manage their liquidity risk. Each credit 
union's liquidity management program should be appropriate for the 
overall level of risk incurred, considering its asset size, 
complexity, capital adequacy, and products or services offered. 
Inadequate liquidity can cause disruptions in member services and 
diminish public confidence. It can also increase a credit union's 
vulnerability to other market and operational risks. The failure to 
understand and manage liquidity risk adequately could easily place a 
credit union in an unsafe and unsound financial position.
    As part of normal contingency planning, credit unions are 
expected to develop

[[Page 21021]]

funding plans that include credit lines that are accessible on a 
timely basis. This may be accomplished with a corporate credit union 
or other source. The appropriateness of granting a CLF advance 
depends on the circumstances of the credit union at the time of the 
liquidity need. Appropriate circumstances for seeking CLF advances 
may include, but are not limited to, borrowing:
    <bullet> To meet an unexpected loss in shares or nonmember 
funds;
    <bullet> To address an unexpected surge of credit demands within 
the credit union's membership; and
    <bullet> To meet liquidity needs due to forces beyond the 
immediate control of the credit union such as an internal operating 
problem or a natural disaster.
    Among other circumstances, borrowing from CLF is not 
appropriate:
    <bullet> To take advantage of a differential between the rate of 
a CLF advance and the rate of alternative sources of funds known as 
spread arbitrage;
    <bullet> To substitute CLF credit for normal, short-term, 
interest-sensitive shares such as certificates or money market 
shares; or
    <bullet> To support a planned increase in loans or investment 
holdings or new loan product offerings.
    CLF will monitor, as necessary, the frequency and duration of a 
credit union's CLF borrowings to make certain that the credit union 
is taking appropriate measures to diminish reliance on CLF advances 
and verify that a more serious liquidity problem does not exist. 
Borrowers are expected to initiate appropriate actions to restore 
adequate liquidity within a reasonable period of time. Facility loan 
officers, at their discretion, may require a borrowing credit union 
to prepare a liquidity restoration plan to detail the action and 
time required to restore its net funds position to the point where 
it is no longer dependent on CLF advances. A loan officer's decision 
to require a plan is greatly dependent on the unique circumstances 
of the borrowing credit union. Factors that may contribute to this 
decision include: (1) The credit union consistently provides 
incomplete, vague, or untimely information needed to approve or 
monitor an advance; (2) the loan officer develops concerns about the 
borrowing credit union's financial condition and ability to repay; 
(3) the credit union appears to have used an advance for 
inappropriate purposes; and (4) the credit union appears to be 
unreasonably dependent on advances without making progress towards 
implementing programs to manage its liquidity risk. These factors 
are only a few of many that a loan officer may consider before 
requiring a liquidity restoration plan.

[FR Doc. 01-10308 Filed 4-25-01; 8:45 am]
BILLING CODE 7535-01-U