December 2019 – This year has demonstrated the importance of preparation and adaptability in the financial services industry. As financial market participants have accelerated preparations for the expected phase out of the London Interbank Offered Rate (LIBOR) as a benchmark index, they have also had to remain nimble in the face of volatile interest rates and changes in the regulatory and legislative landscapes. During this time of relative uncertainty, FHLBank Atlanta has maintained its steadfast focus on serving as a trusted partner to our shareholders and reliably delivering products and expertise to support their success.
The FHLBank System and FHLBank Atlanta have been working with stakeholders at every level of the industry to prepare for the expected phase out of LIBOR at the end of 2021. Market participants have taken steps to ready their operations for a shift to the Secured Overnight Financing Rate (SOFR), but critical to the transition from LIBOR to SOFR is the development of SOFR debt and derivatives markets. With the FHLBanks serving as the leading issuer of SOFR-based debt, the market for SOFR debt grew substantially in 2019. Investor demand has been strong, and for the first nine months of 2019, the FHLBanks issued $132 billion in SOFR floating-rate debt. We expect to continue as a leading issuer in the market heading into 2020.
FHLBank Atlanta has also taken important steps to prepare our systems, operations, and product offerings to ensure that we can continue to serve shareholders’ funding needs reliably as the SOFR market matures and the transition away from LIBOR reaches its crescendo. Our team is also prepared to serve as a knowledge resource for shareholders as they refine and execute their own transition plans. We have provided regular updates related to the LIBOR-SOFR transition and will continue to keep shareholders informed of developments such as recommendations on contract fallback language and the evolution of the SOFR interest rate market for cash products and derivatives.
Interest Rate Volatility
Interest rates have remained low by historical standards, which has resulted in favorable funding rates for shareholders. However, weakness in the long end of the curve has presented challenges for financial institutions in generating yield on investable assets. And while the brief rate spike in the overnight repurchase market in September had a modest effect on market participants, the event highlighted the challenges the Federal Reserve faces in ensuring liquidity when demand for reserves is uncertain. The Fed was able to stabilize the market, but experts have noted that future volatility in the repo market may pressure the Fed to move past ad-hoc infusions to more permanent solutions such as a standing facility.
Developments in Washington
In Washington, housing finance reform has found renewed momentum. In September, the administration released a plan that provides a framework for both administrative and legislative action. With respect to the FHLBanks, the plan recommends the Federal Housing Finance Agency (FHFA) reconsider its 2016 rule that barred captive insurance companies from FHLBank membership and suggests Congress consider expanding FHLBank membership to additional classes of mortgage lenders. The FHFA and Treasury also have taken an important step toward recapitalizing Fannie Mae and Freddie Mac and releasing them from their conservatorships by eliminating the net worth sweep of their profits.
As we look ahead to next year, we are mindful that 2020 is a presidential election year, and we will continue to monitor the legislative and political landscapes for developments that may impact the FHLBanks and our shareholders’ businesses. Our Policy Action Leaders network provides regular updates on public policy affecting the financial services industry. Shareholders can subscribe to these updates on the Bank’s website.
We will also continue to support our shareholders’ as their trusted advisors. We remain committed to delivering innovative funding solutions, educational opportunities, including our Annual Member Conference in June, and expertise on critical challenges that are driving change within the financial services industry today.
President and Chief Executive Officer
The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial, and accounting advisors before entering into any transaction.