[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