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U.S. Federal Home Loan Banks rely less on short-term debt: FHFA's Watt
May 23, 2017 / 7:00 PM / 6 months ago

U.S. Federal Home Loan Banks rely less on short-term debt: FHFA's Watt

(Reuters) - The U.S. Federal Home Loan Bank system has made progress in depending less on short-term debt to fund its longer-term assets through the sale of longer-dated bonds, Federal Housing Finance Agency Director Melvin Watt said on Tuesday.

Federal Housing Finance Agency Director Mel Watt testifies before a Senate Banking Committee hearing on 'The Status of the Housing Finance System After Nine Years of Conservatorship' on Capitol Hill in Washington, U.S., May 11, 2017. REUTERS/Yuri Gripas

The regulator of the FHLBank system, as well as sibling mortgage finance agencies Fannie Mae and Freddie Mac, has sought to address concerns the 11 regional FHLBanks would be vulnerable if investor demand for their short-term debt were to dry up.

“A year later, we have seen some progress on this front. While the FHLBank System as a whole is reducing maturity mismatches, some FHLBanks are doing better than others,” Watt said in a prepared speech at the annual conference of FHLB directors in Washington.

Last year’s money market fund reform has buttressed demand for FHLBank short-term debt, or discount notes, but concerns persist that this type of financing would be disrupted in times of market turmoil as seen during the global credit crisis.

The FHLBank system lends to banks and other member financial institutions primarily to help them make mortgages to consumers. In 2016, it provided $705.2 billion in loans or “advances,” up $71.2 billion from a year earlier, bringing the system’s assets above the $1 trillion threshold for the first time since 2010.

As FHLBanks have reduced their offerings of discount notes with durations of three months or less, they have raised their issuance of floating-rate notes with maturities of up to 18 months and longer-dated securities through their global debt program, Watt noted.

“In making all of these adjustments, the FHLBanks are being aided by more favorable bond rates for longer-term debt, making these issuances less expensive,” he said.

Meanwhile, the FHFA plans to issue a liquidity rule by the end of 2017, replacing the one outlined in 2009, to ensure the FHLB banks have enough cash on hand during market stress, Watt said.

Moreover, the regulator will continue to monitor the FHLB system’s lending to large members. While advances to smaller members grew overall last year, the 10 largest borrowers accounted for 80 percent of the increase, he said.

“We want to ensure that each FHLBank is pricing their advances to large members appropriately and that the FHLBank has appropriate contingency plans if a large member decreases demand for advances or is unable to repay its advances,” Watt said.

Reporting by Richard Leong; Editing by Chizu Nomiyama

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