Member Advantage

First Quarter 2017

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José R. González


Our housing mission is vital to our cooperative: it shapes our culture, supplements our commitment to the community and strengthens our partnerships with our members. Our Affordable Housing Program, First Home Clubsm and Community Lending Programs provide our members and our cooperative with the ability to make immediate and lasting investments in neighborhoods, towns and cities across our region. Through these programs, we promote stability in communities and create opportunities for families and individuals to grow.

Last year, we focused on expanding the reach of our housing mission. We created an internal Affordable Housing and Community Investment Committee, drawing on expertise from across the FHLBNY to help ensure that our housing programs have the full strength of our franchise behind them. Throughout 2016, we substantially increased our member education and outreach initiatives to raise awareness of all of our affordable housing and community lending programs.


José R. González
President and Chief Executive Officer 




As we end the first quarter and begin the second quarter of 2017, we still face a relatively flat yield curve with a Fed Funds rate of 1% and a 10-year Treasury yield hovering just below 2.50%. Although the longer end of the yield curve has experienced significant upward movement since the 2016 elections, the past two Fed Rate moves have flattened the slope of the yield curve, further pressuring Net interest Margins (NIMs).

The 10-year Treasury is averaging 2.45% year-to-date for 2017 — up only 28 bps from the average of the prior three years (2.17%), although up over 100 bps since its recent low of 1.37% (recorded on July 6, 2016). Despite economic metrics pointing to an improving economy, which is expected to fuel stronger loan demand for our members, wider margins have yet to be fully realized. We’ve all heard much talk about rising interest rates, especially with current political and fiscal policy stances appearing to move us toward an era of decreased regulation and the potential of massive economic stimulus, which combined could be significant fuel to propel GDP beyond the current 2% range. However, if global geopolitical and market influences continue to put pressure on the long end of the yield curve, members will still be faced with the issue of a flat yield curve and narrow NIMs, albeit with a higher volume of loan originations due to increased lending activity.

10 yr Treasury chart

Financial institutions are certainly traversing through “murky waters.” The following are some thoughts and strategies to consider as you navigate through the current landscape, presented to potentially help position your institution for a variety of different scenarios in the years ahead.


As mentioned in previous editions of the Member Advantage, we often see members positioning their balance sheets for a rise in rates, neglecting the forgone income in their assessments of risk should rates not rise. With the significant NIM pressure we’ve been experiencing over the past several years, sitting on excess capital is foregone income, forgone capital growth and missed opportunity. The FHLBNY can provide you with strategic funding solutions that could help you boost bottom-line income, achieve balance sheet growth and capitalize on opportunities while mitigating risk.

Leverage Capital with Regular Advances

Many members leverage their capital through FHLBNY financing when their asset growth surpasses that of their deposit growth. Our members’ product of choice is generally Fixed-Rate Advances, either short-term or long-term to match-fund longer term assets. During the post-financial crisis era, a large part of our advance book was relatively short-term, so that members could enhance earnings during a period where there was no clear indication of rate increases on the horizon. Due to the uncertainty in the long end of the Treasury curve, many members are still “rolling short” and waiting for pressure on the long end of the curve to subside. Conversely, some members view that the current rate environment still offers relatively cheap funding and are locking in term advances now to be prepared for rising rates. It all depends on your institution’s asset liability management (ALM) position and market sentiment.

Manage Liquidity "At the Margin"

We often hear of our members running deposit raising campaigns and offering preferential rates to attract term deposits as a way of managing their interest rate risk. Attracting new customers and “mining” your existing customer base is understandably critical when building franchise value. However, we’ve also heard of deposit raising campaigns being costly and how offering preferential rates have cannibalized the deposit base as existing customers shift their funds into higher-yielding deposit products. Managing interest rate risk with customer CDs can also be risky, largely due to the inefficient “breakage fees” that are often present in CD agreements (i.e., in the event alternative investments become very compelling, customers could move their funds out of your institution, regardless of breakage fees).


Collateral Guide


We have a wide diversity of lenders within our cooperative that provide valuable personalized service, which often gives them a competitive advantage when dealing with the unique circumstances of their customer base. However, there has been an undeniable transformation occurring in the mortgage lending landscape due the rapid evolution of financial technology platforms over the past several years. “Frictionless lending” is the term that has been coined for the technology that allows customers to obtain mortgages and other loans via their smart phones and the Internet, and is fast becoming the norm. This technological evolution is evident by the trend in residential mortgage underwriting, as there has been explosive growth amongst nonbank mortgage originations over the past several years. Inside Mortgage Finance Publications, Inc. reported that in 2008 nonbank mortgage originations accounted for 27% of all mortgage originations, and in almost eight years climbed to approximately 48% as of Q1 2016. It is estimated that nonbank originations have recently surpassed that of banks and accounted for over half of all mortgage originations in the U.S. as of Q3 2016.


FHLBNY educational programs


Members may wish to keep in mind the potential economic benefit of the FHLBNY’s dividend, which, depending on the advance term, can substantially lower the “all-in“ borrowing cost of an advance. The FHLBNY has an activity-based capital stock requirement equal to 4.5% of its outstanding advances. The performance of our capital stock has been historically strong, and has benefitted members by offsetting or lowering the “all-in” cost of the advance.

For example, if your institution borrows a one-week advance for $1 million at 102 bps, with a capital stock requirement of $45,000 (with a dividend yield assumption of 5.65%), the net income from the activity-based stock purchase would effectively reduce the interest expense of this trade by $39.96, or effectively lowering the “all-in” rate to 83 bps — 19 bps less than the coupon rate.






Since our last edition, two members joined the FHLBNY cooperative:
» Ameritas Life Insurance Corp. of New York
» Transatlantic Reinsurance Company


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