You Have the Power — Using the Callable Advance for Flexible Funding in Challenging Times
The Callable Advance was developed in consultation with our members to help meet their changing liquidity needs and to assist in their asset/liability management.
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. Callable Advances are available with final maturities of 3, 5, 7, and 10 years, and offer 1-, 2-, 3-, or 5-year “lockout” periods before the advance can be called without penalty. Members can select either the “European option” for a one-time lockout period, or the “Bermudan option,” where members will have multiple options (quarterly) to call the advance following the lockout period. For example, a 5-year, non-callable 1-year (5NC1) Bermudan Callable is a 5-year advance that would permit a member to call the advance, without penalty, one year from the origination date of the advance. If the member decides not to call the advance at that time, they will have the option to do so quarterly thereafter.
Callable Advances enable a member to terminate an advance at no additional cost, in whole or in part, after a predetermined lockout period. Callable Advances offer significant flexibility—if interest rates decline or remain static, you can prepay and potentially rebook at lower rates. If you are funding mortgages and prepayment speeds are greater than anticipated, you can execute a partial extinguishment. If term funding is no longer required to manage your balance sheet, you may simply extinguish.
The Callable Advance is priced higher than the Fixed- Rate Advance to account for the call options members own. The option cost is blended into the overall cost of the advance. The rate will not change for the life of the advance. Interest on the advance will be calculated on an Actual/360 day count basis, with interest paid quarterly and principal due at maturity (or when the member calls the advance). The same collateral and credit parameters that govern all advances will apply to the Callable Advance.
Members may wish to use the Callable Advance as an effective asset/liability management tool, providing a way to hedge against interest rate volatility. Regulators are becoming increasingly focused on what financial institutions are doing to prepare for a rise in interest rates. Since the member has the option to call the advance away from the FHLBNY, the Callable Advance can provide an excellent funding option with added flexibility for those members concerned about interest rate risk.
In addition to being an excellent tool for liquidity management, the Callable Advance can be an effective tool for funding fixed- and adjustable-rate mortgage loans or securities while retaining the ability to lower funding costs if rates decline and prepayments on loans or securities increase. The Callable Advance could be especially beneficial to members purchasing jumbo residential mortgages, as it can be used to complement the consumer’s mortgage call option. Those members in need of immediate funding, who also expect future retail deposit growth, will have the opportunity to pay off the Callable Advance using the new deposits without incurring a prepayment fee.
Note: In order to use Callable Advances, a member must complete a product disclosure certification agreement. The FHLBNY will require this agreement to be re-executed every 2 years. Prior to executing a trade, the member must also attest to observing and understanding the pre-disclosure examples posted on the FHLBNY’s public website. Members will be sent a confirmation letter upon completion of a transaction.
Disclaimer: Notwithstanding any language to the contrary, nothing contained in these disclosures is intended to constitute an offer, inducement, promise, or contract of any kind. Any product descriptions and pricing may be subject to change without notice.
The content provided in these disclosures is presented as a courtesy to be used only for informational purposes and is not represented to be error free. The FHLBNY makes no representations or warranties of any kind with respect to the content contained herein, such representations and warranties being expressly disclaimed. The FHLBNY is not a financial or investment advisor.
Moreover, the FHLBNY does not represent or warrant that the content of these disclosures is accurate, complete or current for any specific or particular purpose or application. It is not intended to provide nor should anyone consider that it provides legal, accounting, tax or other advice. Such advice should only be rendered in reference to the particular facts and circumstances appropriate to each situation. The FHLBNY encourages you to contact appropriate professional(s) and consultant(s) to assess your specific needs and circumstances and to render such advice accordingly. In addition, the FHLBNY is not endorsing or recommending the use of the means or methods contained in or through these disclosures for any special or particular purpose.
It is solely your responsibility to evaluate the risks or merits of any funding or investment strategy. In no event will FHLBNY or any of its officers, directors or employees be liable for any damages — whether direct, indirect, special, general, consequential, for alleged lost profits, or otherwise – that might result from any use of or reliance on these materials.
Member Services Desk:
(212) 441-6600 or
(800) 546-5101, option 1
Callable Advance Highlights
(rates provided as of August 27, 2019)
- 5NC1 Bermudan* Callable Advance rate: 2.42%
- 5-Year Fixed-Rate Advance rate: 1.72%
- Cost of option: .20%
With the Bermudan option, the member owns the option to pay back the advance at the end of the first year, or any three- month period thereafter, with nine business days’ notification.
- Minimum advance size: $5 million
- Maximum advance size: $100 million
- Initial program size: $3 billion
- Final maturities available: 3, 5, 7, or 10 years
- Lockout periods: 1, 2, 3, or 5 years
- Call options: Bermudan (quarterly) or European (one-time)
- Interest payment: Quarterly based on Actual/360 day count
- Required option notification: 9 business days
- Competitively priced
- Fixed rate for the life of the advance
- No prepayment fee when called on specified date
- Ability to more closely fund fixed-rate mortgages and commercial loans held in portfolio
- Can help with liquidity management
- Ability to take advantage of downward movements in interest rates and steep yield curves
- Potentially useful hedging tool against mortgage loan prepayment risk and interest rate risk
- Whole loan and security collateral is acceptable