NEWS: On July 28, the NCUA and other federal banking regulators issued an “Addendum to the 2010 Interagency Statement on Funding and Liquidity Risk Management on the Importance of Contingency Funding Plans.” The new addendum is attached to NCUA’s Letter to Credit Unions 23-CU-06.
The update emphasizes that credit unions and other depository institutions should regularly evaluate and update their contingency funding plans (CFPs). The regulators referred to the unprecedented deposit outflows resulting from the early 2023 bank failures.
According to the addendum, depository institutions should assess the stability of their funding, keep a range of funding sources, and regularly test any contingency borrowing lines to prepare staff in the case of adverse circumstances.
As explained by CUNA, credit union liquidity and contingency funding plan requirements are based on credit union asset size:
- Under $50 million: Credit unions must maintain a basic written liquidity policy that provides a credit union’s board-approved framework for managing liquidity and a list of contingent liquidity sources that can be accessed in adverse circumstances.
- $50 million to $250 million: Credit unions must have a written liquidity policy and must establish a CFP that clearly delineates strategies for addressing liquidity shortfalls in emergencies and identify contingent liquidity sources, among other requirements.
- Greater than $250 million: In addition to a written liquidity policy and CFP, the credit union must establish access to at least one contingent federal liquidity source such as the Federal Reserve’s Discount Window and/or the NCUA’s Central Liquidity Facility.
As indicated above, access to a contingent federal liquidity source is required for all federally insured credit unions with $250 million or more in assets. A credit union under this asset category may demonstrate access to a contingent federal liquidity source by:
- Maintaining regular membership in NCUA’s Central Liquidity Facility (CLF), which provides a contingent federally sourced backup liquidity where a credit union’s liquidity and market funding sources prove inadequate.
- Maintaining membership in the CLF through an agent member (corporate credit union).
- Establishing borrowing access at the Federal Reserve Discount Window by filing the necessary lending agreements and corporate resolutions to obtain credit from a Federal Reserve Bank.
The addendum states that if contingency funding arrangements include discount windows, the depository institutions should ensure they can borrow from the discount window by:
- Establishing borrowing arrangements;
- Confirming that collateral is available to borrow in an appropriate amount;
- Conducting small value transactions regularly to create familiarity with discount window operations;
- Establishing familiarity with the pledging process for collateral types; and
- Being aware that pre-pledging collateral can be useful in case liquidity needs arise quickly.