Security Backed Deposits

This unique investment offering provides a double guarantee on your credit union’s deposit with us. In addition to the safety normally associated with deposits, the CFF provides additional protection to your credit union funds by specifically assigning high quality assets of the investee/borrowing credit union as collateral to your deposit. The interest rates offered are financed by the investee credit union and is competitively priced. Indeed both the investor and trustee credit unions gain from great rates demonstrating the advantage of investing in your own credit union fraternity. Security Backed Deposits – Reinforced Security with Superior Rates!!!

In its drive to regain Credit Union Depositor confidence in the aftermath of the Clico fallout, the CFF will be focusing on its Security Backed Deposit for the mobilization of most of its future deposits.

Investopedia defines an asset backed security as a financial security that is ‘backed’, (i.e. financed by, or secured by), a loan, lease or receivables other than real estate or mortgage backed securities. A good example of an asset backed security is the Security Backed Deposit product currently being offered by the Central Finance Facility.

As the financial intermediary of the Cooperative Movement, the CFF finances loans to credit unions through deposits from other credit unions The Board of the CFF is mindful that several credit unions may be hesitant to invest future funds, as they may be concerned that they may be exposed to the risks the CFF faces with Clico. Using the Security Backed Deposit eliminates such risks as the deposit is protected by specific assets and does not depend on the financial strength of the institution.

The Security Backed Deposit uses the assets of the borrower, in most cases a portion of a healthy and performing loan portfolio; the cash flows from these loans are used to finance the loan. Because of its low operating margins, the CFF allows most (90%) of the interest earned on these loan to return to the investing credit union. So the deposits are safe and the returns are great! Let us take an example:

Credit Union ABC wishes to borrow $10 million to finance the construction of a new building. ABC does not want to go to a Commercial Bank and take a mortgage for 10 or 15 years. ABC has a total of $25 million of performing loans on its Balance Sheet.

ABC can approach a Co-Operative intermediary such as the Central Finance Facility for funding. The CFF would construct an asset backed security to provide the $10 million in finance to ABC in the following manner:

The CFF would approach potential investors and solicit deposits totaling $10 million; this will be done in increments of $2 million annually for a period of 5 years. So investors have the option(s) of a 1 year to a 5 year investment, or a mix of investments with different maturities. Typically, the 1 year investment will attract the lowest rate of return and the rates would increase for each year invested up to year 5; i.e. a 1 year investment may return 3%, while a 5 year investment may be 6%. This example applies to the investor.

The borrower, ABC Credit Union now has its $10 million in financing, at rates lower than the commercial bank, and also for a term of only 5 years. The asset backed security is structured so that ABC pays interest to the investors in each year and simultaneously retires principal of $2 million at the end of each year for 5 years.

The above example is a pertinent local example of an investment that can serve the Credit Union movement successfully as an alternate form of low-risk exposure to a product that pays above-market rates of return.

The CFF will only be lending to financially strong credit unions so that they can continue to achieve their developmental goals. But the real opportunity is to credit union investors who are seeking safe investments with more than competitive returns.