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.
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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.