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Federal Home Loan Bank System Lender of Next to Last Resort?

Federal Home Loan Bank System Lender of Next to Last Resort?. Ashcraft, Bech and Frame 45th Annual Conference on Bank Structure and Competition Chicago, May 2009.

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Federal Home Loan Bank System Lender of Next to Last Resort?

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  1. Federal Home Loan Bank SystemLender of Next to Last Resort? Ashcraft, Bech and Frame 45th Annual Conference on Bank Structure and Competition Chicago, May 2009 The views expressed in the presentation are those of the author and are not necessarily reflective of views at the Federal Reserve Bank of New York, Federal Reserve Bank of Atlanta or the Federal Reserve System.

  2. Why this paper? • Is the Federal Reserve not the Lender of last resort? • True! … and the Fed has been most creative • “Need teaches naked womenhow to spin” • Then: Discount Window • Now: Alphabet soup: TAF, TSLF, PDCF, AMLF, CPFF, MMIFF, TALF …

  3. The Stigma of the Discount Window • Fed tried to make DW attractive: • “Penalty” cut to 50 bps • Term extended to 30 days • Teleconference: sign of strength ? ? ? ? ? ?

  4. Maximum bid size 10% of amount offered Attractive minimum bid (Overnight Index Swap/ IOR) The Term Auction Facility 1.4% 1.7% 1.6% 1.4% 1.8% 1.6% 1.2%

  5. Liquidity crisis but no LoLR-lending! • LoLR effect not measured in only $ • Stigma • But … there was another game in town • A lender that said yes when everybody else were saying no! • … this lender was cheaper • Your neighborhood Federal Home Loan..

  6. Federal Reserve and FHLB Its purpose is to establish a series of discount banks for home mortgages, performing a function for homeowners somewhat similar to that performed in the commercial field by Federal Reserve banks through their discount facilities. President Herbert Hoover - July 22, 1932 John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA: University of California (hosted), Gerhard Peters (database). Available from World Wide Web: http://www.presidency.ucsb.edu/ws/?pid=23176.

  7. Federal Home Loan Bank System • A GSE Created in 1932 • 12 FHLBs + Office of Finance • Federal Housing Finance Agency (FHFA) • Coops with 8000+ members - Open to banks after S&L crisis • Elected + public interest directors • Member: 10%+ of portfolio in residential mortgage related assets (incl. MBS) • Mission: Housing financing … and “a reliable source of liquidity for its membership” • Severally and Jointly Liable • Advances (Collateralized Loans) and other … • Capital: Membership and activity requirements • Super Lien on other assets of borrower • Stricter haircuts than Discount Window • Never a credit loss on advances

  8. The 12 FHLBs

  9. FHLB System Combined Balance Sheet as of EOY ‘07 Source: Federal Home Loan Banks 2007 Combined Financial Report, authors’ calculations

  10. Concentration Risk for Advances Q4 2007 Source: Call and Thrift Financial Reports, FHLBs 10-Q

  11. Prior August 2007 $Billions Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements

  12. 2007H2 $Billions Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements

  13. 2008Q1 $Billions Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements

  14. 2008Q2 $Billions

  15. 2008Q3 $Billions Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements

  16. 2008Q4 $Billions Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements

  17. April 2009 $Billions Source: Federal Reserve H.4.1 statistical release and Federal Home Loan Banks financial statements

  18. From illiquidity to insolvencyIncreases in Advances by FHLB Members: 2007:Q2 to Q4 TARPx2 ULLP TARP TARPx2 ULLP TARP TARP TARP ULLP: Unusual Large Loss Protection Note: Merill Lynch = Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co., FSBSource: Call and Thrift reports

  19. Three points! • Ultimate LoLR is the U.S. Treasury • The Fed is not the sole LoLR • Treasury – Credit lines to GSEs • Central Liquidity Facility for credit unions • Federal Home Loan Banks ? • LoLR part of the regulatory framework • Supervision, deposit insurance • Complex, convoluted and dates back to 30s

  20. LoLR Framework in the US

  21. Final Slide

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