Member Advantage

March 2013

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The FHLBNY’s Advance Modification Program: an Increasingly Utilized,
Powerful Option in Balance Sheet Management

While members have continued to operate well in this prolonged and challenging economic and regulatory environment, they still face headwinds in their drive to optimize earnings. One way the FHLBNY can help is through its Advance Modification Program (“modifications”) for Putable Advances. Advance modifications are a strategic option to help improve net interest margins (NIM), better manage interest rate risk, and capitalize on historically low rates by extending further out on the curve while not incurring an upfront prepayment fee. This edition discusses why current market conditions have made modifications appealing, which modification strategies members have used to achieve their objectives, and what operating guidelines and considerations members should be aware of before modifying an advance.

Why Now May be the Right Time to Modify a Putable Advance

Although modifications have been available since September 2010, where Putable Advances can be modified into either new Putable or Fixed-Rate Advances, modifications have recently become a popular and effective option for members. In fact, members (both large and small) have modified a total of over $9 billion in Putable Advances since the initiation of the program. Modifications are expected to continue to be an attractive strategy as members face declining NIMs (a 13 bp decline from 2011 to 2012), asset spread compression, and limited opportunities to help reduce liabilities.

Furthermore, current market conditions continue to make modifications advantageous. Advance rates and the cost to extend along the curve are near historic lows. Before analyzing the right modification strategy for your institution, having a general understanding of all the factors and market conditions that impact modifications is essential. The table below lists some general structural factors and market conditions that can impact modification rates.

Factors and conditions to consider

Which Modification Strategies Worked for Members

Modifications appeal to members of varying sizes and types. The following table highlights how members have taken advantage of different modification strategies to improve their net interest margin, reduce optionality and interest expense, and capitalize on low rates.


What are the Operating Guidelines and Considerations?

Currently, members can modify Putable Advances into either new Putable Advances or into new Fixed-Rate Advances. The following table lists the guidelines, considerations and requirements that all members should review before requesting a modification.

Strategies to Consider as Alternatives to Modifications

  • Prepaying existing advances and restructuring into Floating Rate Advances, while utilizing off-balance sheet derivative products (such as caps) as a way to effectively hedge the interest rate risk. This strategy could potentially have accounting implications that should be reviewed with your advisors.
  • Utilizing the Callable Advance to build-in prepayment options that can help reduce interest rate risk and prepayment risk at minimal added cost. The Callable Advance is essentially a Fixed-Rate Advance that gives members the option of calling (terminating) the advance on predetermined dates, prior to maturity, without incurring a prepayment fee.
  • Laddering maturities with medium- to long-term advances in the current low rate environment. This strategy has been implemented by members including those that are flush with deposits, but in need of managing interest rate risk with structures not offered in the deposits market.

To discuss how your institution can participate in the Advance Modification Program or discuss restructurings, the three alternate strategies mentioned, or any of the FHLBNY’s funding options, contact a Calling Officer at (212) 441-6700.

Eligibility and Requirements

Other Announcements

Have You Seen the FHLBNY’s Resource Center for Members?
The FHLBNY recently added a Resource Center to its public website under the “Members” tab. The Resource Center was created to centralize information that is often requested by our members. This section also houses strategies and tools to help address members’ funding needs. Visit and bookmark the Resource Center today!

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