Federal Housing Finance Agency Director Mel Watt sounded alarm bells Tuesday about Home Loan Banks' reliance on short-term funding in the form of discount notes.
During a speech to the FHLB's director's conference, he noted that at yearend 2015, discount notes made up 54% of outstanding Home Loan Bank debt, compared to 43% in 2014 and 39% in 2013.
"Short-term funding requires more frequent debt rollover than longer-term funding and this could become a safety and soundness issue if liquidity dries up unexpectedly," Watt said. "The FHLBs and the Office of Finance are having ongoing discussions about how to address this issue."
Watt's warning alarmed Jaret Seibert, a Washington policy analyst at Guggenheim Partners.
Forcing the FHLBs to rely on "longer-term financing will boost the cost of advances," Seiberg wrote in a note to clients. "That could be a negative for housing by raising the costs of mortgage lending that is supported with advances."
Watt also reiterated concerns regarding insurance companies and large bank members, saying that some FHLBs have large exposures to a few individual members.
"Across the system, the top four borrowers accounted for 24% of aggregate advances at the end of 2015," Watt said. "We continue to encourage you to exercise due diligence to establish conservative haircuts and controls over collateral pledged" to support advances.
Seiberg said the comments suggest "more scrutiny over big users of advances."
"That could result in big borrowers using the FHLB system for fewer advances. Anything that reduces volume risks raising costs for all borrowers," Seiberg said in his research report.
In his speech, Watt said that 2015 was a very profitable year for the FHLBs and they continued to build retained capital and increased their assets by 6% to $969.6 billion due primarily to increases in advances to member depository institutions.