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

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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

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$ B

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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

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2006M01 2006M07 2007M01 2007M07

Net advances since July 2007Federal Reserve lending and institutions support

$B

illio

ns

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4

8

12

16

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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

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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

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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

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300

2006M01 2006M07 2007M01 2007M07 2008M01

Net advances since July 2007Federal Reserve lending and institutions support

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06M01 06M07 07M01 07M07 08M01

Net advances since July 2007Federal Reserve lending and institutions support

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2006M01 2007M01 2008M01

Net advances since July 2007Federal Reserve lending and institution support

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2006M01 2007M01 2008M01

Net advances since July 2007Federal Reserve lending and institution support

2008Q3

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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

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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

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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

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FHLBFederal Reserve

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$$$ Credit Line + Implicit Government Guarantee

$$$ Credit Lines

12 x Capital Credit Line from Federal Financing Bank

DW + TAF

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Swap w. ECB + SNB

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Final Slide

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Primary Credit to Depository InstitutionsSpread in all-in cost bwt. FHLB NY and Discount Window (right axis)

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