What’s Your Credit Union’s Liquidity Strategy

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Compliance preparations for the National Credit Union Administration’s new emergency liquidity rule must have been completed by March 31 2014.

The liquidity rule sets up three-tiered emergency liquidity requirements for credit unions with less than $50 million in assets, between $50 million and $250 million in assets, and more than $250 million in assets.

Federally insured credit unions (FICUs) with less than $50 million in assets must maintain a basic written emergency liquidity policy but will not be required to take further action. All FICUs with assets of $50 million or more are required to develop contingency funding plans describing how their credit union will address liquidity shortfalls in emergency situations. FICUs with assets of $250 million or more would be required to have access to a backup federal liquidity source for emergency situations.

Why wouldn’t credit union’s with less than $250 million in assets not want to have access to a backup federal liquidity source such as the discount window or CLF for emergency situations?

The final rule does not include the Federal Home Loan Banks (FHLB) as an acceptable source of emergency liquidity, although eligible credit unions required to meet the federal source provisions would be free to borrow from a FHLB for nonemergency purposes. Without the FHLB, credit unions have two options to ensure a federal liquidity source for emergency situations: Becoming a member of the NCUA’s Central Liquidity Facility (CLF) by subscribing to CLF stock or access to the Federal Reserve’s discount window.

I strongly supports the use of the home loan banks for liquidity.

Why be concerned now about liquidity when most credit unions are still awash with funds resulting from a flight-to-safety fund inflows and loan portfolio outflows due to lack of loan demand?

• Rising rates typically are used to manage economic recoveries. so it is likely rising rates will be accompanied by a return of flight-to-safety funds to the market and a spike in loan demand, putting many credit unions back in the tight liquidity environment of a few years back.

• Many credit unions have rate floors under their variable rate loans.  As rates move up, rates on these loans won’t move for a while. But your cost of funds will.  The result is a compressed net interest margins or NIM

The objective of a viable liquidity policy and strategy is to provide a framework to minimize the adverse effects of a significant and sustained liquidity crisis.  This can result from changing economic or interest rate conditions, deposit outflows, unusually strong loan demand, intense competition, an international crisis, or any other factors that can deplete the liquidity of the credit union.

In the event of a serious and sustained liquidity crisis, various strategies, of which some would be considered preventative and must be implemented prior to the onset of a crisis.  Other strategies are reactive and may be implemented immediately.   The strategies will differ in terms of the implementation time, costs, risks, financial implications and regulatory consequences.

The first place to look for sources of liquidity is within your own balance sheet. More

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ABC picks up NAFCU interchange concern

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The following post is a re-print from the National Association of Federal Credit Unions.   NAFCU is a respected and influential trade association that exclusively represents the interests of federal credit unions before the federal government and the public. NAFCU provides its members with representation, information, education, and assistance to meet the challenges that cooperative financial institutions face in today’s economic environment. The association stands as a national forum for the federal credit union community where new ideas, issues, concerns and trends can be identified, discussed, resolved.

Dec. 21, 2010 – Concerns lodged by NAFCU over the negative impact on consumers, credit unions and other small institutions of the Federal Reserve Board’s debit interchange proposal continued to make news over the weekend.

ABC News ran a story online that pointed to retailers’ positive reviews of the rule, which would essentially result in a fee cap of 12 cents per debit card transaction. However, it also points to comments from NAFCU and other financial industry trades that this is an effective 85 percent cut in interchange fee income for debit card issuers, which “will negatively impact not just large card processors like Visa and MasterCard, but consumers as well.”

The debit interchange proposal is being issued under a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law requires the Fed to come up with a debit interchange fee that is “reasonable and proportional to the issuer’s cost.”

The law exempts institutions with less than $10 billion in assets from the Fed’s interchange fee limit – whatever that turns out to be – but NAFCU believes the market will eventually enforce that limit on all providers.

House Financial Services Chairman Barney Frank, D-Mass., one of the lawmakers for whom the reform package is named, said the Fed’s proposal comes up short. Frank expressed concern that whatever savings are achieved will not be passed on to the consumer.

“Unfortunately the evidence we’ve seen elsewhere is that consumers don’t get any benefit,” he was quoted saying in news reports.

Frank has also expressed concerns the limit will hurt small banks even though they are technically exempt from that provision of the law.

Frank has written the Fed urging that small institutions and consumers not be adversely affected by the Fed’s debit interchange rule. Fifteen senators took similar action in the days prior to that, and Sen. Claire McCaskill, D-Mo., who voted against including the interchange language in Dodd-Frank, followed up with her own letter on Friday.

McCaskill noted specific concerns that the instructions provided in the law explicitly bar the Fed from considering overhead costs in setting debit interchange fees, in effect preventing debit card issuers from recouping the full costs of offering cards to consumers.

“[T]here are other ways of addressing disputes over interchange fees,” she stated. “Potential solutions could emphasize transparency and consumer choice, rather than setting interchange rates directly.”

NYS Foreclosure Actions on Home Mortgages

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I recently attended a conference consisting of attendees from credit unions around New York State.  Many, were unaware, that on December 15, 2009, New York State Governor Paterson signed legislation allowing a larger population of distressed homeowners to benefit from consumer protection laws and foreclosure prevention opportunities previously available only
to borrowers of “high-cost,” “sub-prime” and “non-traditional” home loans; establish certain requirements for plaintiffs in foreclosure actions to maintain the foreclosed property; establish protections for tenants residing in foreclosed properties; and strengthen certain consumer protections to prevent distressed homeowners from falling prey to rescue scams.

New York is now the slowest state in the country at processing foreclosures; the average New York homeowner in foreclosure is 600 days behind on their loan, according to data from Lender Processing Services.

Contact me to discuss how the provisions of this legislation will impact credit unions and how to comply while managing the costs associated with these non-performing assets.

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