Federal Home Loan Bank System
Lender 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 …
2,500
2,000
$Billions
1,500
1,000
500
0
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
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
1.4%
1.7%
1.6%
1.4%
1.8%
1.6%
• Maximum bid size 10% of amount offered
• Attractive minimum bid (Overnight Index Swap/ IOR)
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, 1932
John 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
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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
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M
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Sa
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$ Billion
The 12 FHLBs
FHLBank Assets
350
300
30-Jun-07
30-Sep-07
250
200
150
100
50
0
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
$8.8
0.7
$1,274.5
100.0
$1,178.9
92.5
Other Liabilities
$42.0
3.3
Membership Capital Stock
$50.3
3.9
$3.7
0.3
($0.4)
0.0
$1,274.5
100.0
Other Assets
Total Assets
Liabilities and Capital:
Consolidated Obligations (Net)
Retained Earnings
Other Comprehensive Income
Total Liabilities and Capital
Source: Federal Home Loan Banks 2007 Combined Financial Report, authors’ calculations
Concentration Risk for Advances Q4 2007
Concentration of Advances for FHLB SF
Citibank, N.A.
30%
42%
Concentration of Advances for FHLB Seattle
26%
B of A OR
31%
WaMu Bank
Merrill Lynch Bank
World Savings
Bank, FSB
WaMu Bank, FSB
Other
Other
10%
22%
21%
18%
Concentration of Advances for FHLB Atlanta
Concentration of Advances for FHLB Boston
B of A RI
35%
37%
38%
Citizens Bank
New Alliance Bank
50%
Other
Other
7%
4%
23%
Source: Call and Thrift Financial Reports, FHLBs 10-Q
Countrywide Bank,
FSB
SunTrust Bank,
Atlanta
E*Trade Bank
6%
Prior August 2007
240
24
200
20
$Billions
16
$Billions
160
12
120
80
40
8
0
2006M01
2006M07
2007M01
2007M07
4
Net advances since July 2007
Federal Reserve lending and institutions support
0
2006M01
2007M01
Net advances since July 2007
Federal Reserve lending and institutions support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2007H2
240
200
$Billions
160
120
80
40
0
2006M01
2007M01
Net advances since July 2007
Federal Reserve lending and institutions support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2008Q1
300
250
$Billions
200
150
100
50
0
2006M01
2007M01
2008M01
Net advances since July 2007
Federal Reserve lending and institutions support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2008Q2
350
350
350
300
300
300
$Billions
300
250
250
250
250
200
200
200
150
150
150
150
100
50
100
100
100
50
50
50
00
06M01
2006M01
0
2006M01
0
2006M01
06M07
07M01
2007M01
07M07
08M01
2008M01
2006M07
2007M01
2007M07
2008M01
Net advances since July 2007
support
Federal Reserve lending and institutions
institution support
Net advances since July 2007
Federal Reserve lending and institutions support
2007M01
2008M01
Net advances since July 2007
Federal Reserve lending and institution support
2008Q3
700
700
600
600
500
$Billions
500
400
400
300
200
300
100
200
100
0
2006M01
0
06M01
06M07
07M01
07M07
08M01
08M07
Net advances since July 2007
Federal Reserve lending and institutions support
2007M01
2008M01
Net advances since July 2007
Federal Reserve lending and institution support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
2008Q4
2,000
2,000
1,600
1,600
1,200
$Billions
1,200
800
800
400
400
0
06M01
06M07
07M01
07M07
08M01
08M07
Net advances since July 2007
Federal Reserve lending and institutions support
0
2006M01
2007M01
2008M01
Net advances since July 2007
Federal Reserve lending and institution support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
April 2009
2,000
2,000
1,600
1,600
1,200
$Billions
1,200
800
800
400
0
400
2006
2007
2008
Net advances since July 2007
Federal Reserve lending and institutions support
0
2006M01
2007M01
2008M01
2009M01
Net advances since July 2007
Federal Reserve lending and institution support
Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements
From illiquidity to insolvency
Increases in Advances by FHLB Members: 2007:Q2 to Q4
Change in
Advances
Q2 - Q4 2007
Advances
Q4 2007
Assets
Q4 2007
$ Billions
Washington Mutual
Advances/Assets
Q2 2007
Q4 2007
Percent
42.4
63.9
325.8
6.9
19.6
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
11.1
11.3
529.8
0.0
2.1
8.3
102.0
1,351.3
7.6
7.6
7.3
8.7
131.2
1.2
6.6
5.9
6.8
132.3
0.7
5.2
5.7
17.2
238.4
5.1
7.2
148.1
368.3
5,354.0
4.6
6.9
TARPx2 Bank of America
TARP Wells Fargo & Co
TARPx2 Citigroup
TARP PNC
TARP Capital One
TARP US Bank
Total/Average
ULLP: Unusual Large Loss Protection
Note: Merill Lynch = Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co., FSBSource: Call and Thrift reports
ULLP
ULLP
• 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
$$$ Credit Lines
U.S.
Treasury
12 x Capital Credit
Line from Federal
Financing Bank
Federal
Reserve
Swap w.
ECB + SNB
FHLB
NCUA CIF
Credit
Unions
Life
Insurance
Thrifts
Banks
Branches
& Subs of..
Foreign
Banks
Non-banks
DW + TAF
Securities
firms
Fannie &
Freddie
Sec. 13(13)
$$$ Credit Line + Implicit
Government Guarantee
120
120
100
80
80
40
60
0
40
-40
20
-80
0
-120
2006
2007
2008
Primary Credit to Depository Institutions
Spread in all-in cost bwt. FHLB NY and Discount Window (right axis)
Basis Points
$Billions
Final Slide