Member Advantage

Third Quarter 2018

View Print Version


José R. González


Last month, we reached a milestone: it has now been ten years since the conservatorships of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers marked both the high and low point of the financial crisis. Since that peak, our economy has made a steady recovery and is currently thriving, as are the Federal Home Loan Banks (FHLBanks). The FHLBank System has posted $1.8 billion in net income through the first six months of the year, and our "critical role" in providing liquidity to the nation’s local lenders has been recognized in positive semiannual reports from S&P and Moody’s. Most importantly, these local lenders continue to recognize the value of their membership with a FHLBank, as reflected in the strong advance demand we continue to see, with the System closing the second quarter of 2018 with $735 billion in funding flowing through communities nationwide. It is this focus on our mission – to provide funding to members in all market conditions – that kept the FHLBanks from the same fate as Fannie and Freddie during the financial crisis, and that has allowed us to serve as a proven partner to our members as we continue to work together to drive our economy forward.



José R. González 
President and Chief Executive Officer


70 Hudson Street
Jersey City, NJ 07302
Please note the new address and stay tuned for more information.




After the Fed raised short‑term rates from near zero percent to now over two percent, some members are experiencing improvements to their net interest margins (NIMs) and realizing earnings and capital growth, as short‑term assets reprice "up the curve" while the cost of core deposit funding remains relatively unchanged (for now). We are just beginning to see members increase rates on their deposit accounts, focused largely on their time deposit offerings. However, we may be hitting a "tipping point" where consumers will demand higher returns on their money. Absent a steepening yield curve, NIM pressure will likely persist as the curve flattens and deposit rates rise. To optimize earnings in these challenging times, it is crucial that members fully understand their interest‑rate risk positions and utilize their asset/liability management (ALM) model as a tool to make appropriate decisions.

Are balance sheet decisions based on the assumption that rates will continue to rise, or are you making the decision to "hedge" against a static or declining rate environment? Where is your institution’s greatest degree of vulnerability, and is that exposure acceptable to you as an institution? Are you factoring lost opportunities into the equation when analyzing risk factors? The following are key areas of focus that could potentially help you thrive and reduce risk at this point of the interest‑rate cycle.

1) Keep Your Eye on Liquidity

As mentioned in the prior edition of the Member Advantage, there is a liquidity "squeeze" occurring in sectors within our district, where deposit competition is fierce amidst a period of stronger loan demand. Additional pressures are coming from new entrants such as fintech firms, which cater to consumers who prefer a more "integrated" experience where transactions can be conducted directly from smartphone devices. Furthermore, in a rising rate environment, there are concerns that liquidity outflow could occur quickly if depositors elect to seek higher‑yielding investments elsewhere, especially since smartphone devices can intensify the speed of funds transfer in this current economic cycle. Deposit outflow could adversely impact your liquidity and interest‑rate risk positions. Booking assets that could be pledged to the FHLBNY for liquidity may be a good strategy to continue your institution on a trajectory of growth. Access to FHLBNY advances could not only assist you with meeting your liquidity needs, but also with providing long‑term funding should your balance sheet require it to meet your ALM metrics. The FHLBNY would be glad to assist with conducting a review of your balance sheet to help ensure you have maximized the level of collateral pledged to the FHLBNY.

Did you know we accept 1st & 2nd lien home equity lines of credit
and expanded lendable value on Private Label CMBS?

Learn the "ins & outs" of collateral pledging with the FHLBNY.
Check out the Collateral Guide

2) Managing the Balance Sheet on a Macro Level

We find some members manage their balance sheets and make decisions on a micro level, choosing funding strategies tailored to specific assets while not properly considering macro factors that have influence. Using your ALM model as a tool in plotting a trajectory toward your income and risk targets is critical in making profitable and risk‑averse decisions. Many asset‑sensitive balance sheets can accommodate longer‑term assets without the addition of long‑term liabilities. Conversely, liability‑sensitive balance sheets may require term funding when adding certain assets to stay within risk tolerance levels. Not looking at your balance sheet on a holistic basis over the long term is "flying blind" and can be costly.

education ad

3) Understanding Risks over a Multi‑Year Horizon

Some members tend to manage their net interest income (NII) at risk over a relatively short‑term planning horizon, such as one or two years. Two sample simulations are provided – one for an asset‑sensitive institution and another for an institution that is only liability‑sensitive in the short term.

Sample Simulation #1 illustrates an institution that appears mildly asset-sensitive, where assets reprice at a faster pace than liabilities. In this scenario, the year one story is income improves slightly as rates rise, while earnings experience modest deterioration as rates decline. However, the magnitude of risk exposure starts to be realized in year two and beyond. You can see this institution's NII drops markedly over the next three years as rates decline, leading to an NII that is roughly half of the base case by year five. The balance sheet behind this illustration could potentially support longer‑term assets that could be funded with short‑term advances. Such action could potentially lead to a more "matched" position; the interest rate risk profile would improve since you'd be guarded against a declining rate environment, experiencing improved earnings in a flat rate environment and modestly rising rate scenario. Also, assuming you have underutilized long‑term "core deposits," spread on the additional long‑term assets could be preserved because the betas on these deposits are generally very low in a rising rate environment.

sample simulation chart

Sample Simulation #2 illustrates an institution that is considered to be liability‑sensitive in the short term, susceptible to rising rates as liabilities reprice at a pace faster than assets. However, in this illustration, the institution is liability‑sensitive beginning in year one into year two. It starts to reap benefits from rising rates in year three and beyond, where the balance sheet becomes asset‑sensitive and NII begins to surpass the base case scenario. If this institution solely focused on the short‑term, they would potentially make uninformed decisions using incomplete data, leading them to believe they could reduce risk by reducing long‑term assets or adding long‑term liabilities.

This sample balance sheet may call for adding longer‑term assets, such as funding with term FHLBNY advances out to the two‑year point, hedging the period of time that is susceptible to NII deterioration. Longer‑term assets could potentially protect this balance sheet from declining rates and improve earnings in a static and even rising‑rate environment. Being properly informed could potentially help you achieve greater NII, mitigate risk and put your institution on the path to improved earnings and capital growth in most scenarios.

sample simulation chart



View Borrowers Guide




Since our last edition, three members joined the FHLBNY cooperative:
  • Corporation for Supportive Housing
  • Horizon Healthcare of New Jersey, Inc.
  • St. Pius X Church Federal Credit Union


events image

LinkedIn image

Your FHLBNY has a deep array of advance products to assist in meeting your ALM needs.
We stand ready to serve you at all points of the interest rate cycle.

Member Services Desk: (212) 441-6600 | Relationship Managers: (212) 441-6700


  Have suggestions for a future topic? E-mail your thoughts to


Related Links

Latest Issues

Third Quarter 2019
2019 FHLBNY Member Symposium Recap

Second Quarter 2019
Gain Valuable Flexibility in a Shifting Interest Rate & Operating Landscape