Federal Home Loan Bank SystemLender of Next to Last Resort?
Ashcraft, Bech and Frame
45th Annual Conference on Bank Structure and Competition Chicago, May 2009
The views expressed in the presentation are those of the author and are not necessarily reflective of views at the Federal Reserve Bank of New York, Federal Reserve Bank of Atlanta or the Federal Reserve System .
• Why this paper?• Is the Federal Reserve not the Lender
of last resort? • True! … and the Fed has been most
creative • “Need teaches naked women how to spin”
–Then: Discount Window–Now: Alphabet soup: TAF, TSLF, PDCF,
AMLF, CPFF, MMIFF, TALF …
0
500
1,000
1,500
2,000
2,500
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
$Bill
ions
Traditional Assets Liquidity Programs for Financial Firms
Support for Specific Institutions Direct Lending to Borrowers and Investors
Purchases of High-Quality Assets
The Stigma of the Discount Window
??
?? ??
Fed tried to make DW attractive:• “Penalty” cut to 50 bps• Term extended to 30 days• Teleconference: sign of strength
The Term Auction Facility
• Maximum bid size 10% of amount offered• Attractive minimum bid (Overnight Index Swap/ IOR)
1.4% 1.7% 1.6% 1.4% 1.8% 1.6% 1.2%
• Liquidity crisis but no LoLR-lending!–LoLR effect not measured in only $–Stigma
• But … there was another game in town• A lender that said yes when everybody
else were saying no!• … this lender was cheaper• Your neighborhood Federal Home Loan..
Federal Reserve and FHLB
Its purpose is to establish a series of discount banks for home mortgages, performing a function for homeowners
somewhat similar to that performed in the commercial field by Federal Reserve banks through their discount facilities.
President Herbert Hoover - July 22, 1932John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA: University of California (hosted), Gerhard Peters (database). Available from World Wide Web: http://www.presidency.ucsb.edu/ws/?pid=23176.
Federal Home Loan Bank System• A GSE Created in 1932• 12 FHLBs + Office of Finance• Federal Housing Finance Agency (FHFA)• Coops with 8000+ members - Open to banks after S&L crisis• Elected + public interest directors• Member: 10%+ of portfolio in residential mortgage related assets
(incl. MBS)• Mission: Housing financing … and “a reliable source of liquidity for
its membership”• Severally and Jointly Liable• Advances (Collateralized Loans) and other …• Capital: Membership and activity requirements• Super Lien on other assets of borrower• Stricter haircuts than Discount Window• Never a credit loss on advances
The 12 FHLBsFHLBank Assets
0
50
100
150
200
250
300
350
$ B
illio
n
30-Jun-07 30-Sep-07
FHLB System Combined Balance Sheet as of EOY ‘07
Amount($ Billions)
Share of Assets (%)
Assets
Advances $875.1 68.7
Cash & Investments 299.0 23.4
Mortgage Loans (Net) $91.6 7.2
Other Assets $8.8 0.7
Total Assets $1,274.5 100.0
Liabilities and Capital:
Consolidated Obligations (Net) $1,178.9 92.5
Other Liabilities $42.0 3.3
Membership Capital Stock $50.3 3.9
Retained Earnings $3.7 0.3
Other Comprehensive Income ($0.4) 0.0
Total Liabilities and Capital $1,274.5 100.0
Source: Federal Home Loan Banks 2007 Combined Financial Report, authors’ calculations
Concentration Risk for Advances Q4 2007Concentration of Advances for FHLB SF
42%
18%
10%
30% Citibank, N.A.
WaMu Bank
World SavingsBank, FSB
Other
Concentration of Advances for FHLB Seattle
26%
22%
21%
31% B of A OR
Merrill Lynch Bank
WaMu Bank, FSB
Other
Concentration of Advances for FHLB Boston
35%
23%4%
38%
B of A RI
Citizens Bank
New Alliance Bank
Other
Concentration of Advances for FHLB Atlanta
37%
7%6%
50%
Countrywide Bank,FSB
SunTrust Bank,Atlanta
E*Trade Bank
Other
Source: Call and Thrift Financial Reports, FHLBs 10-Q
Prior August 2007
0
40
80
120
160
200
240
2006M01 2006M07 2007M01 2007M07
Net advances since July 2007Federal Reserve lending and institutions support
$B
illio
ns
0
4
8
12
16
20
24
2006M01 2007M01
Net advances since July 2007Federal Reserve lending and institutions support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2007H2
0
40
80
120
160
200
240
2006M01 2007M01
Net advances since July 2007Federal Reserve lending and institutions support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2008Q1
0
50
100
150
200
250
300
2006M01 2007M01 2008M01
Net advances since July 2007Federal Reserve lending and institutions support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2008Q2
0
50
100
150
200
250
300
2006M01 2006M07 2007M01 2007M07 2008M01
Net advances since July 2007Federal Reserve lending and institutions support
0
50
100
150
200
250
300
350
06M01 06M07 07M01 07M07 08M01
Net advances since July 2007Federal Reserve lending and institutions support
0
50
100
150
200
250
300
350
2006M01 2007M01 2008M01
Net advances since July 2007Federal Reserve lending and institution support
0
50
100
150
200
250
300
350
2006M01 2007M01 2008M01
Net advances since July 2007Federal Reserve lending and institution support
2008Q3
0
100
200
300
400
500
600
700
06M01 06M07 07M01 07M07 08M01 08M07
Net advances since July 2007Federal Reserve lending and institutions support
0
100
200
300
400
500
600
700
2006M01 2007M01 2008M01
Net advances since July 2007Federal Reserve lending and institution support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2008Q4
0
400
800
1,200
1,600
2,000
06M01 06M07 07M01 07M07 08M01 08M07
Net advances since July 2007Federal Reserve lending and institutions support
0
400
800
1,200
1,600
2,000
2006M01 2007M01 2008M01
Net advances since July 2007Federal Reserve lending and institution support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
0
400
800
1,200
1,600
2,000
2006 2007 2008
Net advances since July 2007Federal Reserve lending and institutions support
April 2009
0
400
800
1,200
1,600
2,000
2006M01 2007M01 2008M01 2009M01
Net advances since July 2007Federal Reserve lending and institution support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
From illiquidity to insolvencyIncreases in Advances by FHLB Members: 2007:Q2 to Q4
Change inAdvances
Q2 - Q4 2007AdvancesQ4 2007
AssetsQ4 2007
Advances/AssetsQ2 2007 Q4 2007
$ Billions Percent
Washington Mutual 42.4 63.9 325.8 6.9 19.6
Bank of America 25.5 57.2 1,667.4 2.2 3.4
Countrywide, FSB 18.9 47.7 121.1 28.9 39.4
Merrill Lynch 11.7 11.7 115.8 - 10.1
Wachovia Corp. 11.3 41.9 740.8 4.5 5.7
Wells Fargo & Co 11.1 11.3 529.8 0.0 2.1
Citigroup 8.3 102.0 1,351.3 7.6 7.6
PNC 7.3 8.7 131.2 1.2 6.6
Capital One 5.9 6.8 132.3 0.7 5.2
US Bank 5.7 17.2 238.4 5.1 7.2
Total/Average 148.1 368.3 5,354.0 4.6 6.9
Note: Merill Lynch = Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co., FSBSource: Call and Thrift reports
TARPx2
TARPTARPx2TARPTARPTARP
ULLP
ULLP
ULLP: Unusual Large Loss Protection
• Three points!–Ultimate LoLR is the U.S. Treasury –The Fed is not the sole LoLR
• Treasury – Credit lines to GSEs• Central Liquidity Facility for credit unions• Federal Home Loan Banks ?
–LoLR part of the regulatory framework• Supervision, deposit insurance• Complex, convoluted and dates back to 30s
LoLR Framework in the US
Life
In
sura
nce
Ba
nks
Th
rifts
Cre
dit
Un
ion
s
Fa
nn
ie &
F
red
die
FHLBFederal Reserve
U.S. Treasury
NCUA CIF
Se
curit
ies
firm
s
$$$ Credit Line + Implicit Government Guarantee
$$$ Credit Lines
12 x Capital Credit Line from Federal Financing Bank
DW + TAF
Fo
reig
n
Ba
nks
Bra
nch
es
& S
ub
s o
f..
No
n-b
ank
s
Swap w. ECB + SNB
Se
c. 1
3(1
3)
Final Slide
0
20
40
60
80
100
120
-120
-80
-40
0
40
80
120
2006 2007 2008
Primary Credit to Depository InstitutionsSpread in all-in cost bwt. FHLB NY and Discount Window (right axis)
Ba
sis Po
ints$
Bill
ions
Top Related