Credit Union Exam Solutions Presents With Flying Colors

MARK: Hey everyone.

This is Mark with a special archive
episode of With Flying Colors.

I hope you enjoy.

For this episode, I'm excited.

We're gonna have a deep dive on
the Central Liquidity Facility,

also known as the CLF for short.

And I have Steve, far with me here
today who's gonna talk through

many of the intricacies of the clf.

Steve, how you doing?

STEVE: I'm doing just fine in the
middle of a snowstorm here in Montana.

MARK: Snowstorms in Montana, November 7th,
and I'm participating from the great state

of Virginia and it's in the eighties.

But you're in Montana, so you win.

STEVE: Yeah.

MARK: Very good.

All right, so Steve, if you could
give a little bit of a background,

your background at N C A.

I know you, you've been helping me
help credit unions over the last

two years since I've left N C a.

You left a little bit before that.

But share with the audience for those
who may not have heard any of the

previous podcasts that you've done.

A little bit of your background at ncu.

STEVE: That's great.

I did about 30 years with ncaa,
working up through the ranks as an

examiner, and then spent a great
deal of time as a problem case off.

US are out on the west coast mainly.

Then I went into the central office and
served roles, different roles in risk

management, and then in my final years
at NCAA, I worked heavily on the risk

based capital rule and served as the
vice president of the central liquidity.

MARK: Very good.

So you have a very unique view that
very few people have ever had having

served as the vice president of the
clfs a lot of the inner workings and

understand the regulation and the
how the federal credit unac works.

And, there's been a lot of dialogue in
different ways from NCAA a recently,

and we'll walk through some of that.

But, in these times that we're
in right now, you hear a lot

about credit unions having.

A little bit more
concerns about liquidity.

It, the last several years it was
that they had too much liquidity,

but liquidity's drying up a little
bit and it has people looking at

their options relative to liquidity.

And part of that goes to
what the purpose of the clf.

So why don't we start theirs?

Steve, could you of walk through the
purpose of the central liquidity facility?

STEVE: In just simplest term, the CLF
serves as a federal liquidity backstop

to credit unions and the industry.

And that's really what it is it
has the ability to borrow from

the Federal financing bank in the
event when liquidity's really.

MARK: And that actually came in
quite handy during the 2008, 2009,

the great recession when there were
liquidity issues all around the planet.

Credit unions didn't escape that
challenge because of the challenges

of the corporate credit unions.

And they, the clf was a, again, a
wonderful tool for credit unions, which

allowed N C a partially allowed the NCO
a to hold to maturity those bonds and

those assets that had been purchased
in the corporate credit unions that

were virtually worthless or, pennies
on the dollar until liquidity returns.

It's.

Go ahead, Steve.

STEVE: Let me kinda just go
over that cuz a lot of people,

it's enough time has passed.

They probably don't remember what the,
what all the CLF did in that and what

all of the things that had to take
place for the CLF to be able to do that.

They had to have Congress remove
an appropriations limit on how

much borrowing the CLF could do.

Cuz at that time while the statute
allowed them to borrow more

money, the The appropriations
rule allowed them to only have 1.5

billion, so that had to be changed.

And then they did all these lending
programs to put liquidity into the system.

They, some people might remember 'em
as the Credit Union System Investment

program, which was a SIP program, and
the Credit Union Homeowners Availability

Relief program, and those loans
that added liquidity in the system.

Total date 0.4.

Then in March of 2019, when the NCO
board took the steps to ize the corporate

credit union by placing US Central
and Westco into conservatorship, the

CLF approved a 10 billion advance
to the share insurance fund in order

for the NNC S F, to extend liquidity
stabilization loans to those institutions.

So by the end of the year 2019,
the CLFS loans totaled 18.3

billion.

The other thing that took place about
that time is then C Board made a change

in the CLFS earnings retention policy
and that they started to retain earnings.

Because even though the clfs operations
are very low risk, they're not zero.

So they started retaining some equity
instead of returning all of it in terms

of dividends on the funds, on deposit.

So those are all the things that
took place then and kinda to go

along that, There's a similar thing
taking place because the CARES Act

allowed the CLF extended some of their
authorities temporarily, and those

generally expired December 31st, 2021.

The NCUA board wrote a letter to
Congress in November of 2021, asking

if these enhancements be written
into permanent statute so they could

keep liquidity in the bad times.

Those were increasing the CLFs maximum
lending borrowing authority statute sets.

Its 12% of basically equity.

And temporarily that was raised,
the 16%, we'll go into this a

little bit more in detail later.

They want a allowed lending to
the corporate credit unions.

There was greater flexibility in agent
membership and we'll talk about agent

membership later and provided the board
with a little bit of clarity and allowed

loans for more of the extension of.

Of loans and kinda loosened up
when the CLF can grant loans.

So they wanted this, They've asked that
those things would be made permanent.

Now that's important because there is no
guarantee that in the event of a future

crisis that the executive branch and the
legislative branch will be accommodating.

And that is a little bit
of a risk that takes place.

It's nice to have all these backstops well
in place and not have to rely on "we sure

hope that Congress does this or we sure
hope the Secretary of the Treasury allows

these things" because we did have Mark,
you remember back then we were in a lot of

offices in the Treasury during that time.

So

A reminder.

MARK: No, we were, you and I you're
bringing back some you're shaking

some cobwebs off some memories.

Some good, some exciting some
scary back in that crisis.

And you and I were involved
in many different ways.

And, you point out the fact that
first, some of the things in the

language and the change you that NCUA
was able to get, even though it was

only for a year or two as tied to the
CARES Act, was from lessons learned

as you said creating a little bit more
flexibilities on the loans they could do.

And that would've been from lessons
learned on how liquidity was utilized

in the last crisis and how it might
be able to have more clarity around

how it could be used moving forward.

But if that all evaporates,
you of go back to ground zero.

As you said, do it when you have the
opportunity potentially to get the votes.

Don't let it evaporate or you
might not ever get it again.

And that's something that NCUA has
obviously been very cognizant of.

The board's been talking about it.

Now, whether or not they'll be
able to get the votes to make

it permanent or extend again

your guess is good as mine cuz as they
say, that takes an act to Congress.

But all great points.

Steve, one other thing that popped into
my head is that 10 billion in liquidity

that you mentioned that, that juncture
of the role that I had I was the

regional director in Albany there the
corporate credit union program who was

the person in charge of that was retired.

They asked me to serve as
the acting director of the

corporate credit union program.

And I was actually, Making that request.

We put, $5 billion into one institution
and had the ability to put $5 billion

into one in US Central, one in West Corp.

And before that, the biggest ask
from the CLF was a credit union

that I had a few years earlier.

So in, in one year's time, I went
to, I went from having to ask for 300

million in liquidity from the N C A
board and explaining they had not seen

it yet, that happen either, right?

So it was a 300 million.

Ask, and it was a huge ask and it was
not a controversial ask, but it a lot

of heavy lifting to get that done.

And then 15 months later we
were asking for 10 billion.

And I just remember pausing when
I was doing that, the irony of

the difference in all those zeros.

But by having all those zeros,
you have the ability to help

more credit unions ultimately.

That's a good kind of primer
to get the conversation going.

And so Steve, the last, over the
last year, the NCO board has done

two briefings two credit unions.

The nco a board meets the
third Thursday generally of

every month other than August.

And so far they've had two
briefings on this topic.

Could you of walk through if there's
anything you'd like to add relative

to why they did that or what was
discussed at those briefings?

STEVE: Yeah it is interesting and a
commentary on the importance that they're

placing on the CLF at this point in time.

The first briefing was in January of
2020, and the one was just recently in

October of 2020, and there's a slides that
you can look at that were presented to.

To the board at that time and they
would provide a lot of details.

I'm just not gonna go through
cuz time won't allow it.

Some of the finer details about the
CLF and those are a useful source.

So keep that in mind as you go forward.

The other thing that they have changed
and commented on there is they've

made the CLF now a permanent office.

When I was there, I was the vice president
and there was a president, and we did

that job as and other duties as assigned.

And now they've made the full-time
position for the CLF president, and

I do believe that the vice president
will be a full-time position and the

CLF has one other just excellent staff
accountant that's just wonderful.

So they've changed the
emphasis that the staff is now.

Dedicated to the clf, which has
allowed things that I can see already

when I look just at the website.

They've improved all of the forms that you
would go to for membership and loans and

all that, and it made them PDF combines
that you can do the inputs on 'em.

And added a lot to the website that
would, has frequently asked questions

that would help you as you're considering
the CF and want more information.

The other thing I always tell people that
I would look at is the audited financial

statements of the share insurance fund.

And all those includes state a
statement from the clf and the footnotes

really tell a tremendous story.

And help fill in any
questions that you might have.

So I really tell people that's very
useful and something I reviewed in

preparing for this presentation.

The the other thing I commented on
is back in 2009, the CLF started

retaining capital for its own losses.

And they don't just retain Will Nelly.

We do study how much.

Equity, the CLF should hold the
same as a credit union does.

And looking at our risk probability
of default and loss given default

analysis was performed, and that's what
determines how much retained earnings

that the CLF has from the investments
and covering operating expenses.

And then the rest is
paid out in dividends.

So that in a nutshell is really
just the the operations of the c.

MARK: Got it.

Got it.

And you mentioned a
lot of documents there.

I'll try and remember to put
those into the show notes.

But you may be smiled when
you referenced footnotes.

You were.

At the, you were the guy way back
in the beginning of my career

at N C A that turned me on to
looking at those footnotes.

There's treasure in those
footnotes, is what I learned

from you way back when, Steve.

And that always tends to ring true.

And as you said, there's
things there in the clf.

If you really wanna become a student
of the clf, check out those footnotes.

So that's great.

So we've walked through the briefing.

So we've walked through the general
operations of the CLF and things

that are going on because of what
you've seen in those briefings.

You mentioned the November,
2021 letter to Congress.

Is there anything else relative
to that letter that you think

we should highlight here today?

STEVE: No I don't think so.

And then that letter is on the
website and can be pulled down, but

it's a very short letter so that
Congress can read it quickly and

get the sense of what they want.

MARK: So clf borrowing ability, we
talk, we've talked through the fact

that there, the CLF has the ability
to borrow that we utilize that.

Quite heavily during the last crisis that
led to when the CARES Act came out, NCO

A wisely going to try and get some things
put in place so they could have broader

authorities on the borrowing authority.

And that's about to expire.

Anything else you'd like to add
relative to that particular topic?

STEVE: Yeah, and they're in the.

that the board members made
at the October session.

You can read those and it provides a
little more on this, but I'll cover a bit

of it to really should take care of that.

The CLS borrowing authority is based
on the capital stock in its surplus.

It's a statutory limit that's
12 times the, that, that amount.

So temporarily the CARES Act raised
that to 16 times, but that expired.

On December 31st, 2021.

So now you look at what the capital
position of the CLF is now, and

to take that times to 12 times.

And so they have the
borrowing authority of 29.3

billion.

So can't you kinda look
at that and go, Wow.

During that corporate crisis it had
loans outstanding of 18 billion.

And, inflation and all that.

And so that's one that tells you
that there's not a lot of margin

for error now because of an item
that'll cover in more detail, but I

can cover it how it affects capital.

Now, the corporate credit unions we're
allowed to do agent memberships, and

we'll cover that in detail, but those
agent memberships came about because

of the CARES Act and that added.

About 400 million in on book capital
and a borrowing authority of about 9

million or in other words, has that
increased the amount of CLF capital stock?

And you take it times the 12
times that generated an additional

10 billion in borrowing a.

So now when that expires and those
funds have to be returned on December

31st, 2022, the CLS borrowing
authority will be reduced to 19.6

billion, which puts it pretty close
to where it was in the crisis.

The source of funds that the CLF has
is from its own funds, and it can

borrow from the federal financing.

We have an agreement with
the Federal Financing Bank.

It works pretty well to renewed
every year, but that really

is briefly a description of
the CLFS borrowing authority.

MARK: Got it.

And so there's two variables there, right?

The Cares Act allowed gave
a 33% increase instead of a

multiplier being 12, it was 16.

And it also allowed for.

For lack of a better word,
the creation of some capital,

which increased the multiplier.

So the result is 10, when this expires,
10 billion of borrowing authority

available to the credit union system
goes away if it's allowed to expire.

Got it.

The, so let's go in a little
bit more detail to the let's on.

Agent membership concept, what that
means, how that works and any other, just

general thoughts or comments on that.

STEVE: Yeah that, that's
a good one to go into.

Now, as I said, The Cares Act temporary
allowed the corporate credit unions.

To become what's called an agent
member of the CLF to a subset of

their members, and that was with
the uniqueness of the CARES Act.

So they, what happened in May of
2020, because of this act, all of

the corporates joined and purchased
capital stock for their members

with assets less than 250 million.

that is, is what contributed to the
increase in the capital stock of

the 403 million that's on deposit.

And that provided the federal
backstop and liquidity for 300.

3,641 is the latest number of the
smaller credit unions that now

had access to a federal backstop.

It's about to end if no, no
changes in the regulation.

And as we talked about before, is
the reduction of that capital being

paid back out and the reduction it
has in terms of how the multipliers

determine and the borrowing authority.

That's where the $10 billion reduction
in the borrowing authority comes about.

MARK: Got it.

Go ahead.

STEVE: Yeah, that, and I when those
corporate credit unions funded that amount

of capital and they'll get it back and
then they were paid a dividend on that.

And I'll go through that dividend
process in a little more detail

with natural person credit unions.

So this is a, an important issue for
the smaller credit unions in that

they, they've lost that federal backs.

MARK: Got it.

No, that's, that.

This is a big loss, for
the small credit unions.

If it does evaporate, that's for sure.

Yeah.

So that's a good segue into
the natural person membership.

Why don't you kinda walk through.

You and I know what natural person credit
union means, and if you kinda look at

the words, you might be able to figure
it out or suss it out as they say.

But in N c a nomenclature,
what's a natural person?

Credit union.

And then what's a natural
person membership of the clf.

STEVE: So the natural person
credit unions, are those credit

unions serving credit union members
versus the corporate credit unions?

The that, that is the important
difference between an agent

member and the natural person one.

So what happens now is credit unions who
now lost that packs up, that feel like

they need something in terms of liquidity.

They all have the ability to become a
natural person member, and you become a

natural person member by filling out the
application that's on the website, which

I recently said has been much improved.

And then you subscribe to the capital
stock of one half of 1% of paid in

and unpaired capital and surplus.

Now you have to put on
deposit with the clf.

One half of that.

And then the remainder is on call.

The amount that you have on
deposit is adjusted after the

year end call report is in.

And that provides a couple of things.

It, it helps.

It maintains the right capital base based
on the membership of the clf, and it

makes n so a go back through working with
the wiring instructions that we have.

So we keep those more up to date
so that has a, an extra benefit.

So now on that amount that you have
on deposit at the cf, a dividend is

paid on that, and it's pretty close
to generally, almost actually the same

as the Fed pays on excess deposit.

For example, in the third
quarter of 2022, it was 2.24%,

and prior to that it was
always, it was less than 1%.

So that shows the, it does
keep pace with the increase in

general interest rates to clf.

The dividend has
increased that amount too.

And, but the CLF of course, invests.

Very short term, number one, because now
it's facing the payout of so much of the

agent memberships, but generally it does
invest rather short to keep its purpose

as being a liquidity source and the
earnings that it has allows it to be able

to pay the dividends that are paid out.

There are 352 regular members.

And the there used to be a waiting
period for getting a loan on

that thing that's been waived.

But the website does a wonderful
guy job of guiding you through

and including all the calculations
that would go into determining how

much you'd have to have on deposit.

And then the the agreements are
fairly lengthy but easy to understand.

MARK: Steve, that's about, if I
did my rough numbers, that's about

7% of credit unions belong and
probably the bigger ones do it.

As you said, the smaller ones are
currently covered through this

other arrangement, but there's
benefits no matter what size you are.

You could argue that maybe a smaller
credit union, it might make more sense

because it gives, because of some
of the advantages that it gives you.

And yeah, I know we're gonna talk
about, borrowing from the clf, but other

than for the good of the order and,
making a deposit that makes a decent

return compared to other options, and
the fact that you have this deposit

and you buy this cert, this stock I
guess it's a stock deposit, unless

I'm mixing up my definitions here.

Th that helps the multiplier.

Do I have that?

STEVE: Yeah.

Yeah, it does.

The more members that the CLF has, the
greater its borrowing authority becomes.

MARK: Back to that multiplier
of 12 or 16, depending on which

operating rule you're under now.

The other thing is what, so
what, let's speak a little bit

to the borrowing from the clf.

If the credit union.

Was going to want to work with the clf.

They find themselves
in a liquidity crunch.

What can you, what do you have
to say about how that works?

And then as a follow up question to
that, or maybe you'll deal with that.

Are there advantages, And I think
there are, from having listened to the

webinar, are there advantages to being
a a CLF member before you find out that

you need the liquidity as opposed to
thinking you might need it later as

far as timing and things like that?

That was a mouthful.

So let's talk about
borrowing from the clf.

STEVE: Yeah.

And in terms of the natural person,
credit unions would really be looking.

Or the CLF members.

It's real dependent.

Some credit unions operate
tighter liquidity than others.

I So certainly if you're a credit
union and you earn tighter liquidity

the federal backstop that you need to
comply with, the regulation, the CLF is

certainly a great serves that purpose.

Now here, somebody that does is, has a lot
of liquidities, don't have a lot of loan.

You may not have as much
need to be on the clf.

Now what happens is if you have a
low liquidity, suddenly an event

happens and now you're faced with a
liquidity problem that can't really be

resolved for general market sources.

Then you have to look to the clf.

The CLF lending authority is
limited a little bit by not a

little limited by the statute.

And it we're back to that they
can't make loans to expand a credit

union's loan portfolio, but the CLF
can grant short term adjustments

and those are 90 day ones.

And those are generally from credit
unions that are affected from

a short term outflow of funds.

And these generally occur in
terms of like the hurricanes

and those types of disaster.

And those ones could come into
play because when an area is

affected by a hurricane, there's
an initial flood out of liquidity.

As everybody has a lots
of stuff to buy and stuff.

Then as insurance payments come back in,
it quickly becomes a great amount that

comes back into the institution, and it
can be difficult for everybody to start

putting those funds to use because there's
just limited resources in the area.

But that's one.

Potential use of it.

There is a seasonal loans that can
be done for those institutions like

agriculture, ones that have a big outflow
of funds at certain times of the year.

Those are generally limited
to a 270 day maturity.

There are protracted credit adjustments of
longer term ones that, that can be done.

The important thing to remember
is if you're borrowing from the c.

You have to be creditworthy,
so it's not a source of funds

for a troubled institution.

It will require approval of
the supervisory authorities,

CWA and the state.

The rate assigned to those loans
is the higher prime or the federal

financing's rate on the advance, and
they have to be fully collateralized.

The by the change has been made.

It used to be that we required would not
lend no more than 90% on even a treasury.

And the n c board did change
that, and that is listed in the

CLF collateral margin table.

So if you're gonna look at borrowing
from them and you can pull up the

CF margin table and look at, these
are the instruments that we would

have believe we would have available
to post as collateral for that.

And you would be able to see how
much you would be able to borrow

based on that available collateral.

And they do require, of course,
that first lean interest on that.

Yeah, that's really quickly.

Borrowing from the C.

MARK: That's good information.

And if I find myself, so let's say
four years ago I was, I was CEO of a

credit union four or five years ago.

I decided I wanted to be
a member of the clf and I.

Find myself, today, potentially wanting
to borrow short term, compare and

contrast that to someone who today
is starting to have that liquidity

problem, but they wanna sign up.

Is there an advantage to having
been a member for four years?

And having all the paperwork
done, the wiring instructions

all done as the approvals.

Because if, the other thing is, I guess
if I'm going through some liquidity

challenge challenges in wanting to
join, I might not be the only person

in line and that might slow things down
at NCU a or my state regulator or not.

Compare or contrast those two.

Is there an advantage to being a member
as far as the speed of getting the.

STEVE: Probably just a marginal reach.

Now that the CLF has a full-time staff,
I would believe that applications

would be able to be processed very
quickly, and like we did in 2008 and

2009, we deputized a lot of people
to be loan officers for the clf.

That was, another one of my duties
during the corporate crisis.

N c.

MARK: your name.

You are deputized to make loans.

Got it.

Yeah.

STEVE: Yeah.

And so they, it has the ability
to staff up in the event's,

got a bunch of application.

The other thing that's keeping important
is if you're doing it now, it kinda

reaction to a liquidity outflow.

It's really hard to look at I'm
gonna require, I'm gonna acquire this

liquidity source, but now I gotta
put this money on deposit with them.

MARK: right?

STEVE: It kinda seems a.

MARK: Defeats the purpose.

And it might be you're putting
more on deposit than the ability to

STEVE: On the short term it, it looks
like it doesn't help your situation if

you look at it in a really short run.

So those people, of course, they've
been members for a while, that money

is a sunk into the clf and they are
receiving a reasonable return on

that, and they wouldn't have to come
up with that at the worst of times.

MARK: It.

Got it.

This has been very informative.

When I think of liquidity, some,
somebody once said, liquidity

doesn't matter until it matters.

And then it's the only thing that matters.

You and I have been involved in
institutions like the corporates

we mentioned like some other.

Troubled institutions that had
long term assets on one side, and

it went from an asset issue to
a liquidity issue real quickly.

And when your liquidity dries up
and you have monumental issues

there, it can be a challenge.

And now that's not.

That's not exactly what the CLF is for
because it's there for other purposes and

not the longer term, et cetera, et cetera.

But it is a great tool for
credit unions to consider.

And there's a lot of good
information out there.

And, before, before I wrap up the,
this episode, Steve, is there anything

else that we should mention to
our listeners relative to the clf?

STEVE: I would say if you're have any
questions at all, I would reach out to

clf, Does have a phone number and I'm sure
it has an email address that I believe you

would receive a ver a very quick response
and they would be able to answer any

detailed questions that you might have.

Anthony who did the presentations
is a very knowledge Anthony capta.

He's a very smart person, and I got to
work with him before I'd left n c a.

So I anticipate that you would be pleased
with your interactions with the CLF staff.

MARK: Yeah, he's a smart guy.

He's the president now.

They're looking to fill the
vice president and again, more.

Resources there.

More professional website, because they've
got more resources to donate it to it.

Steve, I wanna thank you for
your time today and sharing the

knowledge you have again, that
very few have relative to the clf.

STEVE: Thank you.

MARK: You bet.

And listeners, I wanna thank
you for joining me for this

episode with Flying Colors.

I hope you enjoyed it.

They'll and I hope
you'll listen again soon.

This is Mark Tri, signing
off with flying color.