Liquidity and Contingency Funding Plans

SUMMARY: The NCUA Board (Board) is issuing a final rule to require federally insured credit unions (FICUs) with less than $50 million in assets to maintain a basic written policy that provides a credit union board-approved framework for managing liquidity and a list of contingent liquidity sources that can be employed under adverse circumstances. The rule requires FICUs with assets of $50 million or more to have a contingency funding plan that clearly sets out strategies for addressing liquidity shortfalls in emergency situations. Finally, the rule requires FICUs with assets of $250 million or more to have access to a backup federal liquidity source for emergency situations.

EFFECTIVE DATE: This rule is effective March 31, 2014.

FOR FURTHER INFORMATION CONTACT: Lisa Henderson, Staff Attorney, Office of General Counsel, (703) 518-6540; or J. Owen Cole, Jr., Director, Division of Capital and Credit Markets, Office of Examination and Insurance, (703) 518-6620.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Why is NCUA adopting this final rule?

B. What did the 2012 proposed rule say?

C. How did the commenters respond to the 2012 proposed rule?

II. Final Rule

A. In general

B. How does the final rule affect FICUs with less than $50 million in assets?

C. How does the final rule affect FICUs with $50 million or more in assets?

D. What additional requirements apply to FICUs with $250 million or more in assets?

E. How are a FICU's assets calculated for purposes of the final rule?

F. Request for Comment Regarding Basel Liquidity

III. Regulatory Procedures

I. Background

A. Why is NCUA adopting this final rule?

The recent financial crisis demonstrated the importance of good liquidity risk management to the safety and soundness of financial institutions. Many institutions experienced significant financial stress because they did not manage their liquidity in a prudent manner. In some cases, these institutions had difficulty meeting their obligations as they became due because sources of funding became severely restricted. In the financial crisis, even institutions that were healthy used emergency federal liquidity facilities when funding costs became prohibitively high. At the time, the borrowing authority of NCUA's Central Liquidity Facility (CLF) was more than $40 billion, and it was able to play a significant role in making liquidity available to credit unions. Because of the 2012 closure of U.S. Central Credit Union and the redemption of most of its CLF stock, however, the CLF's borrowing authority has been reduced to just over $2 billion.

These events followed several years of ample liquidity. The rapid reversal in market conditions and availability of liquidity during the crisis illustrated how quickly liquidity can evaporate. This illiquidity can last for an extended period, leading to an institution's inability to meet its financial obligations and possibly its insolvency. Many of the liquidity-related difficulties experienced by financial institutions were due to lapses in basic principles of liquidity risk management. This rule will strengthen FICU liquidity risk management, which is crucial to ensuring the credit union system's resiliency during periods of financial market stress.

B. What did the 2012 proposed rule say?

The 2012 proposed liquidity rule required FICUs with less than $10 million in assets to maintain a written liquidity policy, including a list of contingent liquidity sources. /1/ It also required FICUs with assets of $10 million or more to have a contingency funding plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls in emergency situations. Finally, it required FICUs with assets of $100 million or more to have access to either the CLF or the Federal Reserve Discount Window (Discount Window). The proposed rule also requested comment on the costs and benefits of applying Basel III liquidity measures to FICUs with assets over $500 million. /2/

FOOTNOTE 1 77 FR 44503 (July 30, 2012). END FOOTNOTE

FOOTNOTE 2 See Basel Committee on Banking Supervision, "Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring," Dec. 2010, available at http://www.bis.org/publ/bcbs188.htm. END FOOTNOTE

C. How did the commenters respond to the 2012 proposed rule?

NCUA received 45 comments on the proposed rule. More than half of the commenters urged that the rule not go forward, stating that NCUA had not justified a need for a liquidity regulation and that the guidance provided by the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management (Policy Statement) /3/ was sufficient to control liquidity risk. Twenty commenters stated that any emergency liquidity regulation should include the option of membership in a Federal Home Loan Bank (FHLB), and ten stated that it should include the option of holding marketable securities.

FOOTNOTE 3 75 FR 13656 (Mar. 22, 2010). END FOOTNOTE

A number of commenters praised the three-tiered approach, although 12 suggested that the lower threshold should be raised to match NCUA's then-proposed amendment to the definition of "small entity." /4/ Seven commenters suggested that the higher threshold should be raised. Six stated that asset size is a poor basis on which to determine whether liquidity requirements should be imposed.

FOOTNOTE 4 See 77 FR 59139 (Sept. 26, 2012). END FOOTNOTE

Several commenters seemed confused about the proposed requirement that FICUs with assets of $100 million or more have access to the CLF or Discount Window. Their comments suggested they believed the requirement meant that these larger credit unions would be prohibited from establishing other sources of liquidity. This is incorrect. As discussed in greater detail below, the Board encourages all FICUs to have multiple sources of liquidity.

Twenty-five commenters objected to the CLF's structure, specifically the required stock investment and the CLF's inability to guarantee same-day funding. The Board notes that the stock investment is required under the Federal Credit Union Act. /5/ The Board also notes that the CLF cannot guarantee same-day funding to credit unions because it borrows the funds it lends from the Federal Financing Bank under terms prescribed by the U.S. Treasury.

FOOTNOTE 5 See generally 12 U.S.C. 1795-1795k. END FOOTNOTE

Eighteen commenters either opposed applying Basel III liquidity measures and monitoring tools to FICUs with assets over $500 million or suggested that NCUA proceed very slowly in considering such application.

II. Final Rule

A. In General

After careful consideration of the comments, the Board has concluded that a liquidity rule is necessary to ensure that FICUs remain resilient in times of economic stress. It, therefore, is adopting as final a modified version of the 2012 proposed rule. As discussed in greater detail below, this final rule addresses concerns raised by the commenters. Accordingly, the Board is adding a new SEC 741.12 to part 741, titled "Liquidity and Contingency Funding Plans." The Board believes that FICUs, relying on the guidance provided in the Policy Statement, generally have managed liquidity risk adequately. However, the financial crisis highlighted the importance for FICUs to have strong policies and programs explicitly addressing the credit union's liquidity risk management. The Board believes it is critical to expand the credit union industry's borrowing capacity after the liquidation of U.S. Central Credit Union.

The Board is retaining the tiered approach of the proposed rule and is continuing to base the tiers on asset size. The Board believes that, while there are exceptions, larger credit unions generally present greater exposure to the NCUSIF. The Board is, however, raising the triggering thresholds from those in the proposed rule.

Since the proposed rule was issued, the Board revised the definition of "small entity" from a credit union with less than $10 million in assets to one with less than $50 million in assets. /6/ The Board also amended two NCUA regulations that grant relief based on an asset threshold, raising that threshold from $10 million to $50 million. /7/ For regulatory relief and regulatory consistency, the Board is raising the lowest threshold in this rule--requiring a basic written policy--to include credit unions with less than $50 million in assets.

FOOTNOTE 6 78 FR 4032 (Jan. 18, 2013). END FOOTNOTE

FOOTNOTE 7 Id. END FOOTNOTE

In response to comments, and to reduce regulatory burden, the Board is raising the highest threshold--requiring established access to a federal liquidity provider--from $100 million to $250 million. While the Board encourages FICUs with assets between $100 million and $250 million to have this access, the Board is not requiring it at this time.

B. How does the final rule affect FICUs with less than $50 million in assets?

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "12 CFR Part 741"

RIN Number: "RIN 3133-AD96"

Citation: "78 FR 64879"

Federal Register Page Number: "64879"

"Rules and Regulations"