NCUA Highlights the Importance of Contingency Funding Plans for Credit Unions

Judy Dahn, NAFCU Regulatory Compliance Counsel

In July 28, 2023, NCUA issued a Letter to Credit Unions 23-CU-06 which included an addendum to the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management highlighting liquidity risks and the importance of depository institutions to maintain actionable contingency funding plans that consider a range of possible stress scenarios. NCUA Chairman Todd Harper stated in the letter that the “events of the first half of 2023 have further underscored the importance of liquidity risk management and contingency funding planning.” This statement was in reference to a few financial institutions whose level and speed of deposit outflows caused liquidity and funding strains at those institutions—and ultimately led to their failures

According to the addendum, credit unions should maintain an actionable contingency funding plan that includes assessing the stability of their funding, maintaining a broad range of funding sources, and awareness of the operational steps required to obtain funding from contingency funding sources. NCUA suggests that as part of a credit union’s readiness plan, it should regularly test any contingency borrowing lines to ensure they are functioning as planned and include a range of reliable funding sources in the event a borrowing line becomes unavailable. Additionally, a credit union should “review and revise contingency funding plans periodically and more frequently as market conditions and strategic initiatives change” to address any potential liquidity risks.

The updated guidance also encourages credit unions to incorporate the discount window as part of their contingency funding plan to help manage liquidity risk. If a credit union includes the discount window in their funding plan, then it should establish and maintain operational readiness to use the discount window using the following guidelines:

  • Establish borrowing arrangements;
  • Ensure collateral is available in the amount appropriate for the funding needs;
  • Be familiar with the pledging process for different collateral types;
  • Be aware that pre-pledging collateral can be useful if liquidity needs arise; and
  • Conduct small value transactions at regular intervals to ensure familiarity with discount window operations.

Lastly, the addendum discusses NCUA’s liquidity and funding plan regulation, explaining that federal and state-chartered  credit unions can access the Central Liquidity Facility as a contingent federal liquidity source which can be used as a backup when a credit union’s liquidity and market funding sources prove inadequate. Specifically, section 741.12 of NCUA regulation provides guidance for credit unions to have liquidity and contingency funding plans, which vary by credit union size.

For example, credit unions with assets greater than $250 million must, among other things, establish and document access to at least one contingent federal liquidity source (i.e., membership in the Central Liquidity Facility or access at the Federal Reserve Discount Window). Alternatively, credit unions with assets less than $50 million 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.

Additional information for Liquidity Risk Resources is available on NCUA’s website, including information about the NCUA’s Central Liquidity Facility and the Federal Reserve’s Discount Window.