The Federal Home Loan Bank System has issued nearly $250 billion of debt over three days this week to provide liquidity to regional and community banks, an indication of the level of stress on the banking system.
The $1.25 trillion-asset system of 11 regional banks issued a combined $136.5 billion in discount notes and bonds on Tuesday and Wednesday, a tapering from Monday's $111.8 billion — the largest single day of issuance in the Home Loan banks' 90-year history. Most of it will be advanced to community and regional banks, where demand for liquidity is heaviest. In addition, the Home Loan Bank System is issuing debt to maintain or rebuild each individual banks' own liquidity.
"The FHLB has been aggressively issuing discount notes and floating rate notes to satiate the banking system's demand for liquidity and the primary pool of capital the FHLB is targeting is the money market universe," said Ian Burdette, managing director and head of term rate securities at Academy Securities, a New York broker-dealer. "Simply put, this is exactly how the financial system is supposed to work. FHLB is an integral part of this funding process, just as it was during the financial crisis in 2008 to 2009."
Regional and community banks have flooded the system with demands for short-term funding, known as advances, to avert further bank runs after
The private cooperative of 11 regional banks, which is considered a "lender of next-to-last resort," issues bonds that are backed by an implied government guarantee. Created during the Depression to fund home loans, the system is owned by its 6,500 members including banks of all sizes, insurance companies and credit unions.
The debt issuance is directly related to members' demands for advances as banks stock up on cash to avert a run on deposits. Silicon Valley Bank had borrowed $15 billion from the Home Loan Bank of San Francisco, while $110.4 billion-asset Signature Bank had
Banks are choosing to tap the Home Loan banks rather than the Federal Reserve's new Bank Term Funding Program, which offers loans to banks, credit unions and others to shore up their liquidity. The Central Bank is offering par value for underwater securities that banks pledge to get short-term loans of 90 days to 12 months in duration with no minimum or maximum borrowing amounts.
"Nobody wants to touch the Fed facility because of the stigma," said Rebel Cole, a finance professor at Florida Atlantic University.
One core reason is that banks' borrowings get reported on individual call reports but there is a lag time. Call reports filed March 31 don't get publicly reported until early May, Cole said.
"They can borrow now to shore up their finances without triggering a run on their deposits," he added.
Andrew Willans, a retired banker who had been a managing director and head of governance at Standard Chartered Bank, said he is concerned about the structure of the Home Loan Bank System, which are privately-owned bank cooperatives that function as a government-sponsored enterprise issuing debt with an implied government guarantee.
"The activity and constitution of the FHLBs is an early warning signal," Willans said. "It encourages risk in the system and they end up making these loans at the worst time, when things are unbalanced, as they are now."
The banking industry as a whole is sitting on some $620 billion in unrealized losses on its securities portfolios as of the end of 2022, according to the Federal Deposit Insurance Corp. But $280 billion of that includes losses on available for sale portfolios in which banks have already taken a hit to capital, Cole said. He estimates that banks have $341 billion, or 15% of the banking industry's $2.2 trillion in capital, in potential unrealized losses.
Banks pledge mortgage-backed securities, U.S. Treasuries and other highly-liquid securities to the Home Loan Bank System as collateral and then are able to tap that at any time for short-term funding needs.
Regulators allow banks to mark their securities as "held to maturity," which means they can avoid taking mark-to-market losses on securities whose value has dropped. That allows banks to avoid taking a hit to their net income from underwater securities.
"A bank can take a long-term portfolio of securities to the FHLBs, access funds and delay capital issues," Willans said.
There are no specific limits provided either by law or regulations to member-borrowings from the Home Loan Bank System. Each regional bank establishes its own members' limits based on assets. For example, the Home Loan Bank of New York has a standard limit on borrowings up to 30% of a member's total assets, though it will consider exceptions to the limit on a case-by-case basis subject to a more vigorous review of a member's financial condition.
Home Loan Bank advances at year-end 2022 were up 133% — to $819.1 billion — versus the prior year.
