Importance of FHLBank Advances in Supporting Housing Finance
April 2018 - By providing access to reliable liquidity, the Federal Home Loan Banks (FHLBanks) play a vital role in helping financial institutions serve the credit needs of communities through all business cycles. Financial institutions that are shareholders of a regional FHLBank have exclusive access to liquidity and funding products that enable them to deliver a variety of financial services and lending products to help families and businesses thrive.
At the end of 2017, the FHLBank System had $1.1 trillion in total assets, primarily in the form of advances (loans) to its shareholder financial institutions and investments in mortgage-backed securities. These assets represent a tremendous amount of liquidity funneled from the global capital markets into the nation’s housing finance system. Because of this liquidity, credit is more readily available to borrowers and is less expensive than it would be without the participation of the FHLBanks in the financial market. This function represents the core of the FHLBanks’ housing finance mission.
Value of Advances
Advances are the primary vehicle that FHLBanks use to deliver liquidity to shareholder institutions. The FHLBanks serve institutions of varying types and sizes, ranging from the largest commercial banks, insurance companies, and credit unions to small community-based institutions that serve defined markets. Regardless of size, financial institutions have limited ways to increase liquidity outside of the wholesale lending market: by raising deposits or accessing the capital markets for debt or equity funding.
Raising retail deposits takes time, particularly for smaller institutions that operate in a limited geographic area, and can be comparatively expensive if competition in a given market is high. In addition, smaller institutions generally do not have direct access to capital markets to raise funds from investors. Advances provide near immediate access to flexible, low-cost liquidity that institutions need to extend credit, and serve as the best conduit for smaller institutions to connect to capital markets.
FHLBanks can deliver liquidity at a scale and cost that few other wholesale funding providers can match. Recent changes in financial regulations compel larger institutions to maintain higher liquidity on their balance sheets as protection against severe shocks to the financial and housing markets. These changes have driven demand for advances higher as national and regional institutions have turned to the FHLBanks for low-cost funds to increase their liquidity balances. Because of their ready access to the debt markets where they raise funds for advance lending, the FHLBanks have been able to respond to this demand very effectively.
Another important feature of advances is that they enable institutions to transform virtually illiquid assets on their balance sheets into liquidity. Advances are secured by collateral pledged by the borrowing institution. FHLBanks accept a variety of asset types as collateral, and importantly, the FHLBanks allow shareholders to use certain core assets – namely mortgages held in portfolio – that they cannot pledge against borrowing at other sources. These high quality mortgages may not meet all specific investor requirements for selling into the secondary market, so they remain on the lending institution’s balance sheet. Advances are efficient and effective vehicles for lenders to leverage these mortgage assets for liquidity and balance sheet management purposes.
Finally, beyond liquidity, financial institutions use advances to manage asset and liability positions and reduce interest-rate risk. In a rising rate environment such as todays, this capability is particularly important for institutions that originate portfolio mortgages. Various advance structures offered by the FHLBanks can help mitigate the risk of holding long-term, fixed-rate loans on the balance sheet. The ability to structure the balance sheet with advances makes lenders more willing and able to extend loans to families and businesses in their communities.
The FHLBanks were chartered by Congress more than 85 years ago to increase liquidity in the financial system. Advances have played a central role in delivering this liquidity to the nation’s financial institutions. As these institutions’ borrowing needs have changed over time, advances as a financial instrument have also evolved, ensuring that lenders could continue meeting the credit needs of their local communities in all economic environments.
Executive Vice President and Chief Financial Officer