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The FHLBNY “Half Time” Report
As we proceed down the slow road to economic recovery, demand for our advance products remains strong. Our advance book has grown by $12.6 billion since last June, and almost half of that growth ($6.2 billion) has occurred since year-end 2013. The majority of new advance volume booked has involved Floating Rate advances (see the table).
This year we have also begun to see members borrowing further out on the curve to “lengthen” liabilities and address interest rate risk. In fact, over 75% of the annual advance growth resides in tenors with maturities greater than one year. Still, there are other members still funding their balance sheets “short” — 45% of our advance book has a maturity of one year or less, compared to 49% a year earlier.
Factors Impacting Advances
Heightened Focus on Interest Rate Risk
The impact of the prolonged low-rate environment with depleted net interest margins, increased expenses, slack loan demand, and shrinking fee revenues has caused financial institutions to invest and seek yield further out on the curve. Since the Federal Reserve communicated their intentions with the direction of rates, many members have funded their balance sheets “short” assuming there would be no movement in short-term rates for the foreseeable future.
Additionally, some members assume that the “surge” deposit balances, which may have accumulated since the start of the financial crisis, are “core” or long-term liabilities. This has largely been true thus far; however, could change rapidly as the economy improves and we enter a different point of the interest rate cycle. These converging factors have caused elevated regulatory concern regarding interest rate risk. Regulators have increased their scrutiny and are requiring more analysis with respect to balance sheet modeling assumptions and management of funding mismatches. We have seen some members address their funding mismatches by utilizing longer-term advances to “lengthen” liabilities and reduce liability sensitivity.
Steep Yield Curve with Improving Loan Demand
Throughout our district, we are seeing positive signs that loan demand is improving, particularly with multi-family and commercial real estate lending, as well as consumer lending. Members have been able to deploy their excess liquidity more profitably, both through lending and growing their security portfolios. Although we have seen a flattening Treasury Yield Curve since year-end 2013, it is significantly steeper than previous years, which has made security yields more attractive and maintaining long-term mortgage production on the balance sheet more palatable (see the chart).
Newly Proposed Liquidity Measures
As discussed in April’s FHLBNY Advantage, BASEL III and the U.S. Interagency’s (comprised of the Federal Reserve, FDIC and OCC) proposed Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)1 both place significant emphasis on keeping readily marketable securities unencumbered in the event emergency liquidity is needed. We anticipate that our membership, particularly those who will be required to comply with the inter-agency proposed LCR and NSFR, will increasingly tap into the value of the FHLBNY’s products and utilize whole loan mortgage collateral to the greatest extent possible so that liquid assets remain unencumbered.
Rate Volatility and Stabilization
Looking at the history of the benchmark 5-year Fixed-Rate Advance, in June 2013 we experienced a rapid rise in long-term rates following a major sell off in U.S. Treasuries caused by comments from former Federal Reserve Chairman Bernanke regarding the tapering of quantitative easing. As interest rates spiked, investors and dealers in FHLB Callable bonds experienced “massive duration extension.” This increase in duration of existing callable bonds severely impacted the demand for new issues of FHLB debt. The duration extension, combined with the increased level of volatility, resulted in our cost of funds moving wider versus U.S. Treasuries than would normally be the case in a bond market sell-off. This situation began to resolve itself by yearend 2013 as the overhang of FHLB debt was eventually absorbed by the market. Rates have been relatively stable since, as evidenced by the 5-year Fixed-Rate Advance trading within a 31 basis point range over the past six months.
Looking Ahead to the Second Half of 2014
“Success Demands Singleness of Purpose”
- Vince Lombardi
Over the past several years, many of our members have faced challenging times, which we have aimed to help buffer by remaining focused on our primary objective, or what the great football coach Vince Lombardi would call our “singleness of purpose”: providing members with low cost, reliable funding. The FHLBNY Advance Volume chart on the right illustrates our ability to expand lending to meet the demands of the financial crisis, by growing our outstanding member advances to over $105 billion at the peak of the crisis in October 2008, and contracting almost back to pre-crisis levels afterward. We expect demand for advances to be strong and our advance book to remain stable for the remainder of 2014 and beyond. If economic expansion proceeds at a more robust pace, then we can expect growth in our book of advances to continue.
We understand that challenges persist, and as your strategic partner, we remain focused on providing flexible and reliable funding to help address your liquidity and match-funding needs. For assistance in finding the right advance and structure for your needs, contact a Calling Officer at (212) 441-6700.
1 Basel III and the U.S. Interagency’s LCR measures an institution’s liquidity available to cover short-term liquidity needs over a 30-day stress scenario, while their NSFR calibrates the required and available “stable” funding looking out over a 1 year time horizon. The LCR is in its final proposal stage and is expected to be effective January 2015. The NSFR is in the proposal stages as well and its planned “rollout” is not expected to take place until 2018. It is planned that both measures will be applied to institutions with assets of $10 billion or greater.
Have HELOCs on Your Balance Sheet? HELOCs are Eligible Collateral.
In an effort to provide maximum liquidity for our members and expand their borrowing potential, the FHLBNY accepts Home Equity Line of Credit (HELOC) mortgages as eligible collateral. Eligibility criteria does exist for pledging HELOCs, including requirements for data submission, a combined loan-to-value ratio limitation of 80% or less, stringent delinquency provisions, etc. Contact a Calling Officer at (212) 441-6700 to explore this collateral opportunity.