CUNA Comment Letter

RE: Docket No. R-1038, Proposed Y2K Special Liquidity Facility

July 2, 1999

Ms. Jennifer Johnson
Board of Governors of the
Federal Reserve System
20th and C Streets, NW
Washington, DC 20551

RE: Docket No. R-1038, Proposed Y2K Special Liquidity Facility

Dear Ms. Johnson:

The Credit Union National Association appreciates the opportunity to comment on the Federal Reserve Board’s proposal to amend Regulation A to establish a Special Liquidity Facility under which financial institutions could borrow from the Federal Reserve Banks to meet liquidity needs that occur in connection with Year 2000 changes. By way of background, CUNA represents over 90% of the nation’s more than 11,000 state and federal credit unions, which serve over 76 million consumers.

Before addressing the proposal, CUNA would like to reiterate our sincere appreciation for the Board’s efforts to work with the National Credit Union Administration in developing a back-up liquidity plan for credit unions for Y2K purposes that allows U.S. Central Liquidity Credit Union to interface with the Federal Reserve Bank of Kansas City to make liquidity available to credit unions, if needed. It is our hope that credit unions will not need access to such liquidity. We believe credit unions are making every effort to comply with Y2K readiness requirements, including restructuring their portfolios to minimize the need for outside liquidity to meet unexpected member withdrawals. However, given the uncertainty surrounding Y2K, it is critical for credit unions, as for other financial institutions, to have a source of emergency liquidity available that will enable them to meet members’ needs regarding Y2K.

Regarding the Special Liquidity Facility, we applaud the Board for proposing a separate program to provide an additional source of Y2K-related liquidity. However, we do have several concerns about the Facility as proposed.

The cost of the credit would be at 1.5 percentage points over the Federal Open Market Committee’s targeted federal funds rate. We realize that the Board wants the rate to be high enough to encourage institutions to first rely on private sector arrangements. Nonetheless, we believe the proposed rate is too high. We encourage the Board to consider reducing the rate to no more than 75 basis points over the FOMC’s targeted federal funds rate, which is closer to the rate charged for other discount window borrowings.

The credit from the Special Liquidity Facility would not be available to credit unions that have less than 6% capital. While most credit unions have net worth that far exceeds that level, we do not believe than any credit union should be denied access to the Facility solely because its capital is below 6%. For example, a credit union with 5.99% capital could very likely be in sound financial condition and thus should be allowed to have access to the Special Liquidity Facility. We are not suggesting that significantly or critically undercapitalized institutions have access, but that credit unions with reasonable net worth and adequate collateral should be allowed to borrow from the Facility.

The Board seeks specific comments on how long the Facility should be available. We are concerned that the anticipated November 1, 1999 opening date may not be soon enough for institutions to build vault cash inventories. We would suggest that institutions be allowed to borrow beginning in September or at least by October 1, 1999. We are also concerned that the anticipated April 7, 2000 ending date may not be long enough to cover Y2K related needs. We urge the Board to consider extending the Facility through the first half of Year 2000.

Again, thank you for the opportunity to comment on the proposed Special Liquidity Facility. We commend the Board for its efforts to make liquidity available to financial institutions, including credit unions for Y2K related purposes. If you have any questions about our comments, please feel free to give me a call at 218-7769.


Mary Mitchell Dunn Associate General Counsel

 NCUA Board
 Carolyn Jordan, NCUA Executive Director
 CUNA Y2K Subcommittee
 Francois Henriquez, General Counsel,
 U.S. Central Credit Union