Member Advantage

April 2014

Liquidity in a Post-Crisis World – Collateral is Key

In today’s post-crisis regulatory environment, significant emphasis is being placed on keeping readily marketable liquid assets unencumbered in the event that emergency funding is needed. BASEL III’s and the US Federal Reserve, FDIC and OCC (agencies) proposed Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)1 both factor in unencumbered, readily marketable securities when determining whether short-term liquidity and longer-term stable funding needs can be met. Going forward, we anticipate that those of 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.

The following discusses the FHLBNY’s Municipal Letter of Credit (MULOC) program where members can leverage the competitive advantage of using whole loan mortgage collateral to secure deposits of State, city and local municipalities. The MULOC program can potentially play an important role for your institution in addressing liquidity needs and in meeting regulatory demands.

Municipal Letter of Credit (MULOC) Program

MULOC triangle

Municipal deposits are used throughout our district to fund the balance sheets of many of our members. Municipalities are required by law to have these deposits collateralized. Some members collateralize their municipal deposits with treasuries, agency debt, and agency mortgage-backed securities, while others use the FHLBNY’s MULOC program. FHLBNY MULOCs are recognized by both the state of New York and New Jersey as acceptable collateral. In New Jersey, it can be easily integrated into the Governmental Unit Deposit Protection Act (GUDPA) program administered by the New Jersey Department of Banking and Insurance.

It is important to demonstrate to regulators that your institution has the ability to tap into many different liquidity sources should the need arise. When members utilize whole loan mortgage collateral to back FHLBNY-issued MULOCs, they keep their “powder dry” and readily marketable liquid assets unencumbered, ready to use in the event of a liquidity event.

Our MULOC program has gained steam in the last few years for a number of factors:

MULOC Average Outstanding
  • Competitive Pricing of MULOCs and Modest Yields on Security Collateral
    Municipalities are restrictive as to the type of collateral they will accept, and, in today’s low rate environment, some members would rather utilize a MULOC than purchase low-yielding, qualified security collateral. Using a MULOC as an alternate to security collateral can allow members to make better use of their available cash to fund loans or other investments to improve NIM. MULOCs are competitively priced and their par value never fluctuates, so there is no need to monitor collateral levels based on market conditions.
  • Increased Acceptance
    When the MULOC program was first introduced as a new form of collateral, there was a learning curve to overcome with a number of municipalities. The FHLBNY worked to diligently promote the MULOC program through member education and local municipal trade associations to gain acceptance of the MULOC as an alternate form of secure and reliable collateral. Over time, municipalities have become much more comfortable with accepting MULOCs as collateral. We have observed that some members require their municipal banking clients to accept FHLBNY MULOCs as collateral due to the significant operating efficiencies they offer. The FHLBNY continues to offer educational sessions for members and their municipal banking clients to assist with the understanding of our MULOC program. Please contact your calling officer if you’d like to take advantage of this benefit.
  • Ability to Keep Readily Marketable Liquid Assets Unencumbered
    As previously mentioned, regulators’ heightened focus on liquidity management has led members to use our MULOC program to a larger degree to keep their readily marketable security collateral unencumbered.
  • Refundable MULOC (REMLOC) to Reduce Over-Collateralization of Municipal Deposits
    A REMLOC reduces over-collateralization on municipal deposit accounts with fluctuating balances. A REMLOC enables a member to choose a deposit “high-water” mark at the inception of the contract, and, if a municipality’s deposit balance never reaches that level, a refund may be requested for the unused portion of the REMLOC.

    MULOCs are available for terms from 2 weeks to 3 years and Refundable MULOC terms are from 2 weeks to 1 year. There is no activity-based capital stock purchase requirement associated with MULOCs.

Visit for additional information on the program, or contact a Calling Officer at (212) 441-6700 to discuss how MULOCs can be used to help positively impact your institution’s liquidity position and bottom line.

1Basel III’s and the US inter-agency 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 be until 2018. It is planned that both measures will be applied to institutions with assets of $10 billion or greater.

New Jersey Credit Union Members: Applying to be a GUDPA Participant? The FHLBNY Can Help.

Check out the FHLBNY’s page created specifically for members interested in participating in the New Jersey GUDPA Program:

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