DBRS Comments on New Credit Union Central Liquidity Structure

DBRS has reviewed today’s replacement of the National Liquidity Fund Agreement (NLFA) between the provincial credit union centrals with a new liquidity structure. DBRS views the new structure as an improvement over the NLFA. There are no rating implications for the credit union centrals currently rated by DBRS (Central 1 Credit Union (Central 1), Credit Union Central Alberta and Credit Union Central of Saskatchewan).

Liquidity Structure:
The new liquidity structure is a credit pool of $2 billion with $400 million committed each from centrals in Manitoba, Saskatchewan and Alberta and $800 million committed from Central 1. The funds will remain on the balance sheet of the respective central and will not be segregated. In a liquidity crisis, a central would have access to up to $800 million under the liquidity agreement ($400 million of its own funds and $400 million shared proportionally from the other centrals – Central 1 would be double this amount). As a result, up to two centrals could have access to the fund at the same time. The new structure is intended to be utilized for more localized events; it cannot be used in a market disruption, which is defined as more than two centrals having a liquidity crisis.

The central could draw on the fund if it breaches a minimum level of liquidity (less than 3% of its system assets). Any drawing would be secured either by the central’s own assets or by member credit union assets.

DBRS has long been aware of the material limitations of the NLFA. While DBRS viewed the agreement as a modestly positive liquidity consideration, it noted that: (1) like other agreements of this kind, its usefulness is limited to emergencies where only one central is in need; (2) the mechanics had not been tested in a major crisis; and (3) the merger of Credit Union Central of British Columbia and Credit Union Central of Ontario created Central 1, which dwarfs the other credit union centrals combined by size, limiting the usefulness of the NLFA to it.

Group Clearing Agreement:
In addition, the centrals have set up a joint venture to house the group clearing arrangement with the Bank of Canada. Formerly, Credit Union Central of Canada (CUCC) operated the Group Clearing Agreement, although in practice, operations were outsourced to Central 1 and the other Centrals. CUCC will become purely a national trade association.

Currently, the centrals pledge 0.5% of system assets to the Bank of Canada for settlement purposes under the Canadian Payments Association; under the new system, the amount pledged has doubled.

Since the centrals indemnify each other under both the existing and proposed Group Clearing Agreement, the increase in the level of assets pledged acts as an additional liquidity buffer for the combined credit union system, albeit on a very short term basis.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Canadian Credit Union Methodology, the Global Methodology for Rating Banks and Banking Organizations and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.