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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello this is Samantha Shares.
This episode covers the National Credit
Union Administration's letter to Credit
Unions on Contingency Funding Plans.
The following is and audio
version of that letter.
But first this podcast is
educational and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
Forty years of NCU A experience.
They assist their clients with
NCU A so they save time and money.
If you are worried about a recent,
upcoming or in process NCU A examination,
reach out to learn how they can
assist at Mark Treichel DOT COM.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with NCU A.
And now the letter.
Letter Number 23 C U 0 6 July 2023
The Importance of
Contingency Funding Plans
Dear Boards of Directors and
Chief Executive Officers:
On July 28, Twenty Twenty three, NCU
A joined with three federal financial
institution regulatory agencies to
issue the enclosed Addendum to the
Interagency Policy Statement on
Funding and Liquidity Risk Management:
Importance of Contingency Funding Plans.
The addendum reminds credit unions
about the importance of a strong
and viable contingency funding plan.
The agencies expect all depository
institutions to maintain actionable
contingency funding plans that consider
a range of possible stress scenarios.
The events of the first half of
twenty-twenty three have further
underscored the importance of
liquidity risk management and
contingency funding planning.
The level and speed of deposit outflows
at a few firms was unprecedented and
contributed to acute liquidity and
funding strain at those institutions.
These events are a reminder to depository
institutions that depositor behavior
and broader market conditions can evolve
over time, and sometimes without warning.
Additional information for Liquidity
Resources is now available on the NCU
A website, including information about
the Central Liquidity Facility and
the Federal Reserve’s Discount Window.
Please contact your NCU A regional office
or state regulatory authority if you have
questions about this important topic.
Addendum to the Interagency Policy
Statement on Funding and Liquidity
Risk Management: Importance
of Contingency Funding Plans
Depository institutions should
maintain actionable contingency
funding plans that consider a
range of possible stress scenarios.
The events of the first half of
twenty-twenty three have further
underscored the importance of
liquidity risk management and
contingency funding planning.
As seen in these events, the level
and speed of deposit outflows at
a few firms was unprecedented and
contributed to acute liquidity and
funding strain at those institutions.
These events are a reminder to depository
institutions that depositor behavior
and broader market conditions may evolve
over time, and sometimes without warning.
Depository institutions should assess the
stability of their funding and maintain
a broad range of funding sources that
can be accessed in adverse circumstances.
In addition, depository institutions
should be aware of the operational
steps required to obtain funding from
contingency funding sources, including
potential counterparties, contact
details, and availability of collateral.
As part of operational readiness,
depository institutions should regularly
test any contingency borrowing lines
to ensure the institution’s staff
are well versed in how to access them
and that they function as envisioned.
In particular, depository institutions
should engage in planning that recognizes
the operational challenges involved in
moving and posting collateral to access
critical funding in a timely fashion.
Such planning may require initial or
renewed contact with entities such
as the Federal Reserve System and
the Federal Home Loan Bank System.
Depository institutions’ contingency
funding plans should recognize that
during times of stress, contingency
lines may become unavailable.
For example, repo lines may become
unavailable to a bank or credit union
borrower either due to concerns of the
repo lender about the creditworthiness
of the bank or credit union or
due to the repo lender needing to
conserve liquidity more generally.
Depository institution contingency
funding plans should take this
dynamic into account and include a
range of contingency funding sources.
Depository institutions should review
and revise contingency funding plans
periodically and more frequently
as market conditions and strategic
initiatives change in order to
address evolving liquidity risks.
For example, an institution that
increases the share of its liabilities
comprised of less stable funding
should consider whether it needs
to increase its capacity to borrow
from contingency funding sources.
The agencies view having access to a range
of reliable contingency funding sources as
a key component of safety and soundness.
Contingency Funding and the
Federal Reserve Discount Window
In an environment where liquidity stress
manifests quickly, the discount window
is an important tool that depository
institutions can utilize in managing
liquidity risk, and the agencies encourage
depository institutions to incorporate
the discount window as part of their
contingency funding arrangements.
If the discount window is a part of a
depository institution’s contingency
funding plans, the depository
institution should establish and
maintain operational readiness to
borrow from the discount window.
Operational readiness includes
establishing borrowing arrangements
and ensuring collateral is available
for borrowing in an amount appropriate
for a depository institution’s
potential contingency funding needs.
Depository institutions should ensure they
are familiar with the pledging process
for different collateral types and be
aware that pre-pledging collateral can be
useful if liquidity needs arise quickly.
Depository institutions that include
the discount window as part of
their contingency funding plan
should also consider conducting
small value transactions at regular
intervals to ensure familiarity
with discount window operations.
Information regarding the
discount window is available
at FRB discount window dot org.
Credit Union Contingency Funding
and the Central Liquidity Facility
Federal and state-chartered credit unions
can access the Central Liquidity Facility
as a contingent federal liquidity source.
The Central Liquidity Facility exists to
provide federally sourced backup liquidity
where a credit union’s liquidity and
market funding sources prove inadequate.
Section seven forty one point twelve
of NCUA’s regulations outlines
requirements for federally insured
credit unions to have liquidity
and contingency funding plans.
The scope of these plans
varies by credit union size.
Credit unions with assets greater than
two hundred and fifty million dollars
must, among other things, establish
and document access to at least one
contingent federal liquidity source.
Credit unions subject to this requirement
may demonstrate access to a contingent
federal liquidity source by maintaining
membership in the Central Liquidity
Facility or establishing borrowing access
at the Federal Reserve discount window.
Credit unions between fifty million and
two hundred and fifty million in total
assets must, among other things, include
in required policies, identification
of contingent liquidity sources.
Credit unions under fifty million
dollars n must maintain a basic written
policy that provides a framework for
managing liquidity and includes a list
of contingent liquidity sources that can
be employed under adverse circumstances.
Information regarding the
Central Liquidity Facility is
available at NCU A DOT GUV.
Thanks for listening and remember
if you need assistance with NCU
A, reach out to our sponsor Mark
Treichels Credit Union Exam Solutions.