FHLBanks: The Advantages of Advances, Part 2
Each FHLBank offers a variety of fixed- and variable-rate advances with different interest rates, payment characteristics, optionality, and maturities. The fact that advances have a number of uses is a huge advantage for members because they are able to select an advance and customize it to meet their needs in any economic environment.
Members use FHLBank advances to:
- Fund new originations and existing portfolios of mortgages
- Purchase mortgage-backed securities
- Manage the substantial interest-rate risk associated with holding mortgages in portfolio
Some members layer in term advances alongside their deposits, altering the duration profile of their liabilities to better suit their assets and mitigate risk. Other members use shorter-term, on-demand liquidity to offset unexpected deposit runoff or to take advantage of an opportunity to quickly add assets. By enabling members to manage their balance sheets effectively, FHLBank advances help members lower their risk as well as the cost of extending credit to U.S. consumers.
Access to FHLBank advances can reduce the amount of low-yielding liquid assets a member would otherwise hold to ensure the same amount of liquidity. In addition, because members may originate loans that are not sold in the secondary market, advances can serve as a funding source for a variety of loans held in portfolio. FHLBank advances can also provide interim funding for those members who choose to sell or securitize their mortgages.
In addition, an FHLBank may make commitments for advances to a member covering a predefined period, aiding members in cash-flow planning and enabling members to reduce funding risk. FHLBank credit products also aid members in asset and liability management. The FHLBanks can offer advances that have amortization schedules that are structured to match the maturity and payment characteristics of mortgage loans. These advances can reduce a member’s interest-rate risk associated with holding long-term, fixed-rate mortgages.
The FHLBanks and their members represent the largest collective source of home mortgage and community credit in the United States. It is a system that works as designed.