[Federal Register Volume 77, Number 146 (Monday, July 30, 2012)]
[Proposed Rules]
[Pages 44503-44509]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18565]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 /
Proposed Rules
[[Page 44503]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 741
RIN 3133-AD96
Maintaining Access to Emergency Liquidity
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice of proposed rulemaking with request for comment (NPRM).
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SUMMARY: The NCUA Board (Board) is requesting public comment on a
proposed regulation requiring federally insured credit unions (FICUs)
with assets of $10 million or more to have a contingency funding plan
that clearly sets out strategies for addressing liquidity shortfalls in
emergency situations. The NPRM also requires FICUs with assets of $100
million or more to have access to a backup federal liquidity source for
emergency situations. Finally, the NPRM requires FICUs with less than
$10 million in assets to maintain a basic written policy that provides
a board-approved framework for managing liquidity and a list of
contingent liquidity sources that can be employed under adverse
circumstances. The NPRM follows an earlier Advance Notice of Proposed
Rulemaking (ANPR) requesting public comment on the scope and
requirements of a regulation regarding backup liquidity requirements.
DATES: We must receive your comments on or before September 28, 2012.
ADDRESSES: You may submit comments by any one of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: Address to regcomments@ncua.gov. Include ``[Your
name]--Comments on Notice of Proposed Rulemaking for Part 741,
Maintaining Access to Emergency Liquidity'' in the email subject line.
Fax: (703) 518-6319. Use the subject line described above
for email.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You can view all public comments on NCUA's Web
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as
submitted, except for those we cannot post for technical reasons. NCUA
will not edit or remove any identifying or contact information from the
public comments submitted. You may inspect paper copies of comments in
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6546 or send an email to OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Lisa Henderson, Staff Attorney, Office
of General Counsel, at the address above or telephone (703) 518-6540;
or J. Owen Cole, Jr., Director, Division of Credit and Capital Markets,
Office of Examination and Insurance, at the address above or telephone
(703) 518-6620.
SUPPLEMENTARY INFORMATION:
I. Background
II. Proposed Rule
III. Regulatory Procedures
I. Background
A. Why did NCUA initiate this rulemaking?
The recent financial crisis demonstrated the importance of access
to reliable emergency liquidity. Currently, 6,019 \1\ FICUs have access
to the Central Liquidity Facility (CLF or facility) by belonging to a
corporate credit union that is in turn part of the agent group headed
by U.S. Central Bridge Corporate Federal Credit Union (U.S. Central
Bridge).\2\ U.S. Central Bridge temporarily holds CLF stock on behalf
of the whole agent group, but it is expected to close in October 2012.
When U.S. Central Bridge redeems the CLF stock upon its closure,\3\
these FICUs will no longer have the CLF as a source of backup
liquidity, unless they choose to join the CLF directly. In light of
these changes, the Board issued an ANPR on the issue of maintaining
credit union system liquidity. 76 FR 79553 (Dec. 22, 2011).
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\1\ This number is based on the 2012 agent member annual stock
adjustment. It excludes credit unions that are not regular members
of the CLF and not members of a corporate credit union.
\2\ NCUA established U.S. Central Bridge to provide an orderly
transition in resolving the failure of U.S. Central Corporate
Federal Credit Union, which historically held the CLF capital stock
on behalf of the majority of credit unions.
\3\ See 12 U.S.C. 1795d(c); 12 CFR 725.6(d)(1).
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B. What is the CLF and how does it operate?
Before discussing the specifics of the ANPR's request, the Board
believes it may be helpful to repeat some of the background material
the ANPR provided regarding the recent financial crisis and the
structure and operations of the CLF.
Depository institutions need to have access to sources of emergency
liquidity from both their own balance sheets and through credit
facilities. When a depository institution exhibits liquidity problems
and its credit providers have uncertainty about its true financial
condition, that institution's ability to obtain credit can rapidly
diminish or cease altogether. The inability of a depository institution
to fund its business-as-usual operations by borrowing can, in turn,
cause its ultimate insolvency and failure if, for example, it were
forced to sell assets at distressed prices to raise necessary funds. In
the financial crisis, even institutions that were healthy used
emergency liquidity facilities when risk aversion reduced the
availability of even short-term liquidity and funding costs became
prohibitively high. Without access to governmental liquidity
facilities, the scope of the crisis and damage to the economy would
have been much more severe.
Governmental liquidity facilities were created by Congress to
provide a stability mechanism to preempt illiquidity situations before
they lead to unnecessary insolvencies or cause systemic disruptions to
the depository industry. This is because depository institutions are a
key element of financial services and the overall economy. Federal
entities that exist to provide liquidity assistance are unique in their
capacity to obtain funding in times of crisis, and this is based on
their backing by the full faith and credit of the U.S. government.
These liquidity
[[Page 44504]]
facilities are viewed as the ultimate backstop for institutions seeking
emergency liquidity in time of need and have proven to be a critical
component of the U.S. government's contingency management during times
of widespread instability.
By way of example, CLF figured prominently in NCUA's contingency
plans during the financial crisis. Through various contingency
programs, such as the Credit Union System Investment Program, the
Credit Union Homeowners Affordability Relief Program, and loans to the
National Credit Union Share Insurance Fund (NCUSIF), CLF facilitated
access to billions of dollars of external liquidity. These programs
totaled approximately $18.4 billion and were orchestrated during the
period between December 2008 and March 2009. Total CLF activity during
the height of the crisis reached as much as $20.5 billion, including
approximately $2.1 billion in liquidity-need loans outstanding. By
having ready access to contingent liquidity through CLF, NCUA was in a
position to inject a critical amount of emergency liquidity into the
credit union system. These liquidity injections helped stabilize
confidence and gave NCUA time to work through the financial
difficulties arising from the failure of the system's largest corporate
credit unions. They, combined with other actions taken by the Board,
were instrumental in maintaining the continuity of vital credit union
services and helped avert higher potential losses to the system.
Essentially, CLF provides a form of liquidity insurance to its
member credit unions through its ability to make liquidity advances to
members funded with matched borrowings from the Federal Financing
Bank.\4\ A credit union primarily serving natural persons may become a
``regular'' member of the facility by subscribing to the capital stock
of the facility. 12 U.S.C. 1795c(a); 12 CFR Sec. 725.3. A credit union
or group of credit unions primarily serving other credit unions may
become an agent member of the facility by obtaining approval from the
Board and subscribing to the capital stock of the facility on behalf of
credit unions in its membership that are not regular members. 12 U.S.C.
1795c(b); 12 CFR 725.4. Currently, there is one agent group
representative, with 19 agent members within that group.
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\4\ The Federal Financing Bank (FFB) is a government corporation
created by Congress in 1973 under the general supervision of the
Secretary of the Treasury. The FFB was established to centralize and
reduce the cost of federal borrowing, as well as federally-assisted
borrowing from the public. 87 STAT. 937, 12 U.S.C. 2281.
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Historically, most natural person credit unions have not elected to
become regular members. Instead, they have qualified for membership in
CLF by joining a corporate that was in turn a CLF agent and part of the
agent group headed by U.S. Central Bridge. As the agent group
representative, U.S. Central Bridge subscribed to, and absorbed the
costs of, capital stock on behalf of all underlying natural person
credit unions represented by the respective corporate credit unions in
U.S. Central Bridge's agent group. U.S. Central Bridge is expected to
close in October 2012, and its role as CLF agent group representative
will cease at that time. When that occurs, the natural person credit
unions that have relied on the existing agent group arrangement for
liquidity insurance will no longer have that protection.
C. What did the ANPR do?
The ANPR requested public comment on the scope and requirements of
a regulation to require FICUs to have access to backup federal
liquidity sources for use in times of financial emergency and
distressed economic circumstances. The ANPR stated that the Board was
contemplating requiring FICUs to demonstrate this access in one of four
ways: (1) Becoming a member in good standing of the CLF directly; (2)
becoming a member in good standing of the CLF through a corporate
credit union; (3) obtaining and maintaining demonstrated access to the
Federal Reserve Discount Window (Discount Window), through which the
Federal Reserve System lends reserve funds to depository institutions;
or (4) maintaining a certain percentage of assets in highly liquid
Treasury securities.
D. What did the commenters say about the ANPR?
NCUA received a total of 60 comments on the ANPR. Approximately
two-thirds of the commenters were either in favor of issuing a
regulation to require FICUs to have access to emergency liquidity or
were silent on the issue but offered suggestions if a regulation was
developed. The remaining one-third opposed a liquidity requirement.
The commenters who supported a regulation argued that an emergency
liquidity requirement would strengthen the credit union movement, help
protect the NCUSIF, and improve the safety and soundness of the
industry. The commenters who opposed the regulation primarily argued
that a liquidity backstop requirement would be counterproductive and
that NCUA should address liquidity concerns about individual credit
unions through the exam process. They argued that existing tools, such
as the Interagency Policy Statement on Funding and Liquidity Risk
Management (Liquidity Policy Statement),\5\ were adequate.
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\5\ See 75 FR 13656 (Mar. 22, 2010); see also NCUA Letter to
Credit Unions No. 10-CU-14, available at http://www.ncua.gov/Resources/Pages/LCU2010-14.aspx.
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The Board has carefully considered all of the comments and
continues to believe that it is essential for every FICU, regardless of
size and complexity, to have a management process for identifying,
measuring, monitoring, and controlling liquidity risk that is
commensurate with its respective needs. As the Liquidity Policy
Statement advises, all financial institutions should have a formal
contingency funding plan (CFP) that clearly sets out the strategies for
addressing liquidity shortfalls in emergency situations.
At this time, however, for FICUs under $10 million in assets, the
Board proposes to require only the maintenance of a basic written
policy that provides a board-approved framework for managing liquidity
and a list of contingent liquidity sources that can be employed under
adverse circumstances. The Board determined that the very smallest
credit unions present relatively limited safety and soundness liquidity
concerns. This determination was made in light of the fact that these
institutions tend to have lower loan-to-share ratios, shorter duration
assets, and higher amounts of balance sheet liquidity than larger
credit unions.
NCUA's primary concern with liquidity adequacy in credit unions is
their ability to handle a rapid loss of liquidity, including a rapid
loss of shares or loss of access to sources of borrowing. When a credit
union's cash and liquid assets are depleted, it naturally will turn to
external funding sources and may even need to tap an emergency
liquidity lender like CLF or the Discount Window to maintain stability
of operations. The level of a credit union's on-balance sheet liquidity
provides a measure of its capacity to respond to such events and, in
turn, its vulnerability to a liquidity loss scenario. NCUA views the
capacity to handle runoff as a major indicator for liquidity risk and a
useful way to evaluate a credit union's liquidity risk management.
NCUA has analyzed credit unions' contingent liquidity needs using a
[[Page 44505]]
measure of interest rate-sensitive liabilities held by each credit
union as a proportion of its cash and short-term investments and a
measure of all deposits as a proportion of its cash and short-term
investments. These measures are highly correlated. The second, broader,
measure is called the ``emergency liquidity ratio'' or ``ELR.'' The ELR
can be calculated for every FICU from existing call report information
\6\ and has been used to inform determination of asset thresholds in
the proposed rule. It provides a comparison among FICUs of the relative
amount of short-term assets available to fund an unexpected and
immediate outflow of deposits.
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\6\ A credit union's ELR is computed by dividing total deposits
by the sum of cash plus investments less than one year. Deposits
include all deposits and shares. Cash and investments less than one
year include cash on hand, total cash on deposit, cash equivalents,
and total investments less than one year.
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NCUA computed the ELR for all FICUs using March 2012 call report
data. The data reveal that generally the ratio of shares to cash and
short-term assets gets larger in larger total asset cohorts. In other
words, small credit unions tend to have a lower ELR and larger credit
unions tend to have a higher ELR. The ELR is a risk ratio: The higher
the measure, the greater the implied susceptibility to a liquidity
event. In light of the general rise in ELR with increasing asset size,
the proposed rule requires FICUs with assets of at least $10 million to
have formal CFPs, as defined in the rule.
The following chart illustrates first quarter 2012 median ELR by
asset class for FICUs.
[GRAPHIC] [TIFF OMITTED] TP30JY12.179
In general, over the $100 million asset threshold, the ELR
generally rises to a level that, combined with institution size,
suggests the need for demonstrated access to a source of emergency
liquidity. Furthermore, larger credit unions have a greater degree of
interconnectedness with other market entities and are more likely to
adversely affect the credit union system, public perception, and the
NCUSIF when experiencing unexpected or severe liquidity circumstances.
The recent financial crisis serves as a stark reminder of how large-
scale liquidity events imperil even the strongest and most well-
capitalized institutions if they do not have ready access to a reliable
source of emergency funds. Consistent with the Liquidity Policy
Statement, the Board seeks to strengthen the credit union system's
ability to withstand the potential impact of stressful liquidity events
and circumstances, and believes this comes in part from strengthening
capacity at the institutional level. The proposed rule requires these
larger FICUs to have a pre-established contingency capability to
respond to unexpected and/or severe liquidity events.
The Board is proposing different asset thresholds in this rule to
minimize regulatory burden on smaller FICUs, while simultaneously
ensuring adequate regulatory coverage of total FICU assets. It
specifically requests comment, however, on whether such asset
thresholds are appropriate for this rule. It also seeks comment on
whether NCUA should use a specific liquidity risk measure--such as the
ELR--to further distinguish among FICUs with the most significant
liquidity risk and should, in turn, use those levels to determine the
scope of the rule's application.
[[Page 44506]]
While it is beyond the scope of this proposed rule, the Board is
exploring whether certain Basel III \7\ liquidity measures and
monitoring tools should be incorporated into NCUA's supervisory
expectations for the very largest credit unions, those over $500
million.\8\ Basel III's proposed standards include, for example, the
potential use of such measures as a liquidity coverage ratio and a net
stable funding ratio. The standards also include liquidity monitoring
tools to track maturity mismatches on the balance sheet, funding
concentrations, and the amount of unencumbered assets available for
secured borrowing. These measures and monitoring tools are designed to
enhance the liquidity risk management framework and improve the banking
sector's ability to absorb shocks arising from financial and economic
stress. NCUA must similarly consider the impact that its very largest
FICUs could have on the liquidity of the credit union system and the
NCUSIF by virtue of their size, complexity, and potential
interconnectedness. The Board requests comment on the costs and
benefits of applying Basel III liquidity measures and monitoring tools
to FICUs with assets over $500 million.
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\7\ 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.
\8\ NCUA has previously imposed additional requirements on
credit unions with assets of $500 million or greater. See 12 CFR
715.5, 715.6, 741.202; see also 77 FR 5155 (Feb. 2, 2012) (adding
Appendix B to 12 CFR part 741, effective Sept. 30, 2012).
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E. What did the commenters say in response to specific questions in the
ANPR?
The ANPR asked commenters to address a number of specific
questions. The questions and comments received are discussed below.
(1) What are the standards and provisions, along with associated
considerations, that should accompany a requirement for federally
insured credit unions to maintain access to backup federal liquidity
sources for use in times of financial emergency and distressed economic
circumstances? Should an NCUA requirement to maintain access to backup
federal liquidity sources contain an exemption for credit unions under
a certain asset threshold, and if so, what should that threshold be?
In response to this question, most commenters suggested that
membership in a Federal Home Loan Bank (FHLB) should be an acceptable
backup liquidity option. This is discussed further in the responses to
Question (2) below.
Nine commenters stated that any liquidity requirement should
contain an exemption for small credit unions. The Board agrees that
regulatory burden needs to appropriately match the safety and soundness
risks. As a result, the proposed rule imposes minimal new requirements
on FICUs with less than $10 million in assets. For FICUs with between
$10 million and $100 million in assets, the proposed rule only requires
the development and maintenance of a CFP to address emergency liquidity
shortfalls.
(2) Are there other sources of credit beyond the CLF and Discount
Window the Board should consider as acceptable to satisfy the need for
a backup federal liquidity source? For example, would a credit union's
maintenance of a certain percentage of its assets in highly liquid
(maturity of 90 days or less) Treasury securities satisfy the need? If
so, what is the appropriate percentage? Also, how should NCUA ensure
that these securities are available to be pledged or sold?
Forty-seven commenters stated that any emergency liquidity
regulation should include the option of membership in a FHLB. However,
two commenters explicitly stated that FHLB membership should not be
included as an emergency liquidity option, arguing that the FHLBs do
not serve as emergency liquidity providers.
The Board believes it is important to draw a distinction between
ordinary funding and emergency liquidity. Well-diversified sources of
external funding are central to sound liquidity risk management. FHLB
membership is certainly one way a credit union can diversify to
guarantee a smooth flow of funding for ordinary operations. Another key
element of liquidity risk management, however, is reliable emergency
funding. Institution-specific issues and market conditions can combine
to quickly deplete a credit union's on-balance sheet liquidity reserve.
In such situations, the Discount Window and the CLF stand ready to lend
on pre-specified terms as long as a credit union meets minimal
borrowing standards and possesses eligible collateral. The FHLBs can
and do offer short-term loans, in addition to longer-term advances. The
Board recognizes, however, that the FHLBs are private institutions
which are not obligated, and may not be able, to meet emergency
liquidity demands in the same way the Discount Window and CLF are
statutorily designed to do. Accordingly, the Board has not included
FHLB membership as an emergency liquidity option in the proposed rule.
The Board notes, however, that FHLBs can provide valuable services to
credit unions of all sizes and encourages credit unions to consider the
merits of FHLB membership.
Several commenters stated that, rather than holding Treasury
securities, FICUs should be able to demonstrate liquidity by holding
cash, short-term marketable securities, certificates of deposit,
saleable loans, and other similar assets. However, the commenters did
not specify the percentage of a FICU's assets that should be maintained
in liquid assets, saying that the amount would be different for each
credit union and would depend on the makeup of the credit union's
balance sheet. The Board generally disagrees that there are other
assets apart from cash and short-term Treasury securities that, during
a liquidity crisis, truly can be converted into cash quickly with
minimal price impact. During the recent financial crisis, even
seemingly highly liquid money market mutual funds temporarily could not
easily be exchanged for cash and had to be stabilized with federal
government guarantee programs.
The Board still believes that maintaining a portfolio of short-term
Treasury securities remains an important source of funds to meet
emergency liquidity demands. It encourages all FICUs to ensure that
Treasury securities are readily available and not pledged or otherwise
encumbered for some other purpose. However, the Board does not wish to
impose a one-size-fits-all requirement on a FICU's portfolio of liquid
assets. Instead, it encourages each FICU to determine its own
appropriate level of liquid assets as part of its normal asset-
liability and interest rate risk management programs. NCUA will
evaluate all FICUs' liquidity in the normal course of examination and
supervision reviews, including their contingency options for meeting
unexpected or emergency needs. The Board believes that it is prudent
for FICUs to have both a cushion of highly liquid assets on its balance
sheet and access to contingent sources of liquidity, but it does not
believe it is sound practice for larger credit unions to meet their
emergency liquidity needs solely by holding highly liquid assets. A
credit union may need to use its portfolio of highly liquid assets as
collateral to secure an advance from contingency funding and/or
emergency liquidity providers. The Board does not wish to limit the
liquidity insurance of credit unions to their existing holdings of
highly liquid assets, as these alone may be insufficient in a crisis.
Accordingly,
[[Page 44507]]
the proposed rule does not include Treasury securities as an option for
demonstrating access to a backup liquidity source.
(3) How can CLF best play a role in the immediate term upon U.S.
Central Bridge's wind down and over the long term in satisfying a
credit union's need for a contingency liquidity source? How should that
role be executed? Are changes to the CLF statute to modernize the way
the CLF functions over the long term warranted, and if so what changes
should be pursued? For example, should the CLF function more like the
Discount Window?
Some commenters questioned the value of the CLF, while others
argued for its ongoing utility. The Board believes the CLF will
continue to serve as an important emergency funding source for FICUs
and is including it as an optional liquidity backstop in the proposed
rule.
(4) What is the best way for credit unions to access CLF (e.g.,
either directly or through an agent)? Should corporate credit unions
continue to play a role and, if so, to what extent should they be
encouraged to purchase CLF stock as agents for natural person credit
unions?
Six commenters were in favor of corporates continuing to act as CLF
agents for natural person credit unions, and six were opposed. Of those
who were opposed, several stated that the corporates cannot afford to
recapitalize the CLF.
The Board understands that many corporates cannot afford to
purchase stock for all member credit unions, as required by the FCU Act
and NCUA regulations. See 12 U.S.C. 1757c(b)(2); 12 CFR 725.4(a)(2).
However, as discussed more fully below, the Board believes that
corporates, independent of agent membership, can still facilitate
natural person credit union membership in the CLF by acting as advisors
and financial intermediaries for credit unions that wish to join the
facility directly.
II. Proposed Rule
A. How would the proposed rule affect FICUs with less than $10 million
in assets?
The Board is proposing to add new Sec. 741.12 to part 741, to be
titled ``Access to Emergency Liquidity.'' The requirement for FICUs
under $10 million, set forth in paragraph (a), is 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. However, the Board
encourages such FICUs to follow all of the liquidity risk management
guidance in the Liquidity Policy Statement, including having a fully
developed CFP to address emergency liquidity shortfalls. A basic
liquidity policy involves merely specifying an overall approach to
managing an institution's liquidity risk. Such a policy establishes
liquidity measures and associated benchmarks, a reporting requirement
to keep the board apprised of the institution's liquidity position, and
a contingent source, or sources, of funding, such as a corporate credit
union or correspondent bank. In contrast, a fully developed CFP also
provides for evaluation of liquidity stress scenarios, outlines
specific actions to be taken and specific sources of liquidity in
emergency liquidity events, and provides for periodic testing of
contingent liquidity sources. Specific features of a sound CFP appear
in paragraph (d) of new Sec. 741.12. As the Liquidity Policy Statement
notes, failure to maintain an adequate liquidity risk management
process raises safety and soundness concerns. See 75 FR 13656, 13660
(Mar. 22, 2010).
B. How would the proposed rule affect FICUs with $10 million to $100
million in assets?
Paragraph (b) of new Sec. 741.12 requires any FICU with assets of
at least $10 million to have a fully developed, written CFP that
clearly sets out strategies for addressing liquidity shortfalls in
emergency situations. Paragraph (d) of the new section details the
requirements of a CFP.
C. How would the proposed rule affect FICUs with $100 million or more
in assets?
In addition to the requirement to have a written CFP, paragraph (c)
of new Sec. 741.12 would require any FICU with assets of $100 million
or more to ensure it has immediate, established access to a federal
backup liquidity source. The proposed rule provides that a FICU could
demonstrate access by any one of the following three ways:
(1) Becoming a regular member of the CLF. The FCU Act and NCUA
regulations establish the requirements for regular CLF membership. See
12 U.S.C. 1795c(a); 12 CFR 725.3. The primary requirement is
subscribing to CLF capital stock in an amount not less than one half of
one percent of the credit union's unimpaired capital and surplus. The
Board believes that there are instances in which natural person credit
unions are willing and financially able to become regular members, but
may be discouraged by the administrative requirements of regular
membership and the provisions of the CLF Repayment, Security, and
Credit Reporting Agreement governing extensions of credit. The Board
notes that, pursuant to the authority of corporate credit unions to
provide liquidity-related services to their members,\9\ and in
accordance with procedures established by the Board, corporates may
facilitate natural person credit unions becoming regular CLF members.
For example, a corporate may perform services such as assisting with
applications of credit, serving as a collateral custodian and
administrator, and assisting with credit reporting requirements. The
Board recognizes that some credit unions that rely on their corporate
for correspondent activities would benefit if such activities included
an arrangement designed to simplify understanding and compliance with
facility requirements and assist with advances of credit before and
after a liquidity-need application is approved by CLF.\10\
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\9\ See 12 CFR 704.12(a)(5).
\10\ A corporate acting as a CLF correspondent would not be an
agent member of the CLF within the meaning of 12 U.S.C. 1795c(b) or
12 CFR 725.4, as it would not subscribe to CLF stock for its
members. For a natural person credit union to be a regular member of
the CLF, it must subscribe to CLF stock.
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(2) Becoming a member of the CLF through an Agent. As noted above,
for a corporate to serve as a CLF agent, it must subscribe to CLF stock
for all of its members that are not regular CLF members.
(3) Establishing borrowing access through the Discount Window. The
Discount Window serves all depository institutions that meet
eligibility requirements established by Federal Reserve
regulations.\11\ To gain access to the Discount Window, the Federal
Reserve requires specific agreements to be executed. Information
regarding these agreements, as set forth in Operating Circular No. 10,
and Discount Window operation can be found at
www.frbdiscountwindow.org.
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\11\ Any depository institution holding liabilities potentially
subject to reserve requirements under Federal Reserve regulations
can establish access to the Discount Window. Such ``reserveable
liabilities'' include transaction accounts and nonpersonal time
deposits. For most credit unions, share draft accounts would be the
principal reserveable liability.
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D. How would the proposed rule work?
Credit unions' assets can grow and shrink rapidly, and a particular
FICU's assets may cross the $10 million or $100 million threshold
repeatedly over a short period of time. In light of this fluctuation,
paragraph (e) of the
[[Page 44508]]
proposed rule provides that a FICU is subject to the requirements of a
higher asset category when two consecutive Call Reports show its assets
to be in that higher category. A FICU will then have 120 days from the
effective date of that second Call Report to meet the triggered
requirements.
III. Regulatory Procedures
a. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any proposed regulation may
have on a substantial number of small entities (those under $10 million
in assets). The proposed rule requires small FICUs to establish a basic
liquidity policy, a best practice for every depository institution.
Since the policy should require only modest effort, it will not have a
significant economic impact on a substantial number of small credit
unions.
b. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part
1320. For purposes of the PRA, a paperwork burden may take the form of
a reporting, recordkeeping, or disclosure requirement, each referred to
as an information collection.
NCUA has determined the proposed requirement that credit unions
under $10 million in assets maintain a basic written liquidity policy
will require some institutions to formalize liquidity risk management
procedures. NCUA conservatively estimates that all 2,475 credit unions
under $10 million in total assets may have to formalize their liquidity
risk policies and that this task should take approximately 8 hours per
credit union. The expected burden of the requirement is: 2,475 FICUs x
8 hours = 19,800 hours.
NCUA has further determined the proposed requirement to establish
and document a CFP constitutes an information collection requirement
but that, because of the Liquidity Policy Statement, approximately 610
out of 3,110 (or 20%) of FICUs with assets of at least $10 million will
already have established such a plan. NCUA estimates that 2,500 FICUs
will have to develop a written CFP and that the task should take a FICU
approximately 24 hours. The expected burden of the requirement is:
2,500 FICUs x 24 hours = 60,000 hours.
NCUA has also determined the proposed requirement to either become
a member of the CLF or establish borrowing access through the Federal
Reserve's Discount Window creates a new information collection
requirement. There are 1,434 FICUs with assets of at least $100
million, 1,048 of which are not currently regular members of CLF and/or
do not report having established Discount Window access. NCUA estimates
that it should take a FICU approximately 4 hours to complete the
necessary paperwork to establish either CLF or Discount Window access.
The expected burden of the requirement is: 1,048 FICUs x 4 hours =
4,192 hours.
While the proposed regulation provides the option of establishing
CLF membership through an agent, NCUA estimates that no corporates will
opt to be agent members at this time and, therefore, no FICUs will
establish membership in this manner.
Summary of Collection Burden
Written Liquidity Policy: 2,475 FICUs x 8 hours = 19,800 hours.
CFP: 2,500 FICUs x 24 hours = 60,000 hours.
Regular CLF membership or Discount Window borrowing access: 1,048
FICUs x 4 hours = 4,192 hours.
Total Burden Hours: 83,992 hours.
As required by the PRA, NCUA is submitting a copy of this proposal
to OMB for its review and approval. Persons interested in submitting
comments with respect to the information collection aspects of the
proposed rule should submit them to OMB at the address noted below.
The NCUA considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the NCUA,
including whether the information will have a practical use;
Evaluating the accuracy of the NCUA's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology; e.g., permitting
electronic submission of responses.
The Paperwork Reduction Act requires OMB to make a decision
concerning the collection of information contained in the proposed
regulation between 30 and 60 days after publication of this document in
the Federal Register. Therefore, a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to
comment to the NCUA on the substantive aspects of the proposed
regulation.
Comments on the proposed information collection requirements should
be sent to: Office of Information and Regulatory Affairs, OMB, New
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk
Officer, with a copy to Mary Rupp, Secretary of the Board, National
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia
22314-3428.
c. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The proposed rule would not have substantial
direct effects 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 proposal does not constitute a policy that has
federalism implications for purposes of the executive order.
d. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of Sec. 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
List of Subjects in 12 CFR Part 741
Credit, Credit unions, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board on July 24,
2012.
Mary F. Rupp,
Secretary of the Board.
For the reasons stated above, the National Credit Union
Administration proposes to amend 12 CFR part 741 as follows:
[[Page 44509]]
PART 741--REQUIREMENTS FOR INSURANCE
1. The authority citation for part 741 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
2. Amend part 741 by adding a new Sec. 741.12 to read as follows:
* * * * *
Sec. 741.12 Access to Emergency Liquidity.
(a) Any credit union insured pursuant to Title II of the Act which
has assets of less than $10 million must 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.
(b) Any credit union which is insured pursuant to Title II of the
Act which has assets of $10 million or more must establish and document
a contingency funding plan (CFP) that meets the requirements of
paragraph (d).
(c) In addition to the requirement specified in paragraph (b) to
establish and maintain a CFP, any credit union which is insured
pursuant to Title II of the Act and which has assets of $100 million or
more must establish and document access to at least one contingent
federal liquidity source for use in times of financial emergency and
distressed economic circumstances. Credit unions must conduct advance
planning and periodic testing to ensure that contingent funding sources
are readily available when needed. A credit union may demonstrate
access to a contingent federal liquidity source by:
(1) Maintaining Regular membership in the Central Liquidity
Facility (Facility), as described in part 725 of this chapter;
(2) Maintaining membership in the Facility through an Agent, as
described in part 725 of this chapter; or
(3) Establishing borrowing access at the Federal Reserve Discount
Window.
(d) CFP. A credit union must have a written CFP commensurate with
its complexity, risk profile, and scope of operations that sets out
strategies for addressing liquidity shortfalls in emergency situations.
The CFP may be a separate policy or may be incorporated into an
existing policy such as an asset/liability policy, a funds management
policy, or a business continuity policy. The CFP must address, at a
minimum, the following:
(1) The sufficiency of the institution's liquidity sources to meet
normal operating requirements as well as contingent events;
(2) The identification of contingent liquidity sources;
(3) Policies to manage a range of stress environments,
identification of some possible stress events, and identification of
likely liquidity responses to such events;
(4) Lines of responsibility within the institution to respond to
liquidity events;
(5) Management processes that include clear implementation and
escalation procedures for liquidity events; and
(6) The frequency that the institution will test and update the
plan.
(e) A FICU is subject to the requirements of paragraphs (b) or (c)
of this section when two consecutive Call Reports show its assets to be
at least $10 million or $100 million, respectively. A FICU then has 120
days from the effective date of that second Call Report to meet the new
requirements.
[FR Doc. 2012-18565 Filed 7-27-12; 8:45 am]
BILLING CODE 7535-01-P