The Federal Home Loan Bank System has made a pitch to the National Credit Union Administration that could tap the credit union movement for tens of billions of dollars in new funds.
In a recent letter to NCUA, the 12 FHLBs urged the credit union regulator to add them to the short list of emergency liquidity providers for credit unions, a move that could spur hundreds more credit unions to take out membership in one of the regional FHLBs.
The move comes as the FHLBs have already emerged as the most important provider of emergency funding to credit unions in the demise of the corporate credit union system. In fact, while the corporate network was seizing up during the failure of U.S. Central FCU and WesCorp FCU, the FHLBs were more than doubling their advances to their 1,060 credit union members, adding almost $25 billion in new funds during the 2007-2008 credit crisis. The FHLBs also served as critical backstops to U.S. Central, WesCorp and the other corporate when other sources of short-term funds froze up.
The emergence of the FHLBs comes during the shrinkage of the corporate network, once the premier source for credit union liquidity, from more than $100 billion in assets to less than a fourth of that.
During the financial crisis, the 12 FHLBs provided an additional $375 billion in short-term liquidity to its 8,000 bank, credit unions and insurance company members, providing a little-known backstop to the financial system during that time.
The FHLBs in their letter to NCUA are urging the credit union regulator to add them as a preferred provider, along with the Federal Reserve's discount window; a portfolio of Treasury securities; and the Central Liquidity Facility, the NCUA-operated fund, in an emergency liquidity rule being considered.
“Unlike certain sources of liquidity that are only available during times of emergency, FHLBank advances serve as a source of liquidity for member institutions, enhancing their funding abilities in all economic cycles,” said the FHLB presidents in their letter.
Dozens of credit unions, many of them in form letters, are also calling for the FHLBs inclusion in a final rule. “The failure to include the FHLBanks as one of the sources for emergency liquidity is contrary to the demonstrated performance of the FHLBank System during the recent financial crisis,” wrote Jaque Cully, president of Central Kansas CU, in one comment letter on the proposal.
In their comment, the presidents of the FHLBs acknowledged that some credit unions will not be eligible to join the system because they lack mortgage assets that are required as collateral for the system's low-interest loans, known as advances. But 73% of the nation's 7,200 credit unions are eligible to join an FHLB.
Just as importantly, the FHLBs asked NCUA to qualify the consolidated obligations issued by the 12-bank system as highly liquid and thus eligible as an emergency source of emergency liquidity under the proposed rule. Consolidated Obligations, like Treasuries, are accepted as safe and highly liquid investments and could serve as a source of emergency liquidity for credit unions during a crisis, they said. In addition, the guaranteed bonds issued by the FHLB System, are available to all credit unions, not just members of a regional bank.
