U.S. Federal Home Loan Banks stock up on cash amid ‘heightened demand’

5:04 pm Monday, March 13th, 2023

(Reuters) -U.S. Federal Home Loan Banks beefed up their lending warchests on Monday to provide more liquidity to banks amid continued higher-than-usual demand for funds as the fallout from the collapses of Silicon Valley Bank and Signature Bank reverberates through medium- and smaller-size financial institutions.

The FHL Bank system raised $88.73 billion by selling short-term notes with maturities from three months to one year on Monday afternoon, according to Informa Global Markets, a provider of syndicated bond data. The offering was raised from an initial $64 billion due to high demand.

The 11 FHL Banks, regional government-chartered institutions that raise money for low-cost lending to their members, are a vital source of funding to regional banks, often a preferred final stop for cash before banks in need turn to the Federal Reserve itself as a last resort.

Their largely behind-the-scenes role has surfaced more prominently since back-to-back bank collapses raised concerns about wider financial stability. On Monday, as financial stocks took a pounding in the aftermath of federal regulators having to step in to keep depositors at SVB and Signature whole, a number of banks touted their credit positions with the home loan banks as evidence of their soundness.

“As members react to a volatile market and seek stable funding, the Federal Home Loan Banks collectively continue to see heightened demand for our advances. Consistent with our statutory and foundational mission to provide liquidity to our members, the FHLBanks are prepared and well-positioned to continue to address our members’ needs,” Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, said in a statement.

The FHL banks are seen as a preferred mechanism because they can be tapped for short-term funding by commercial banks without the taint associated with using the Federal Reserve’s own safety net backstop known as the discount window.

It was unclear if the new backstop rolled out by the Fed on Sunday – the Bank Term Funding Program – would draw business away from the FHL banks, but so far that does not appear to be the case.

Advances to members have spiked during other periods of severe market stress in order to stabilize liquidity, most notably at the beginning of the 2008 financial crisis and in March 2020 at the onset of the COVID-19 pandemic.

Indeed, they became an ever-more-important source of liquidity for banks in the last year as the Fed lifted interest rates by 4.5 percentage points, putting pressure on their investment portfolios and deposit bases. Credit extended to commercial banks by the FHL banks more than doubled last year to more than $800 billion by year end.

“The Federal Home Loan Bank System is strong, stable and stands ready to serve our members,” Donovan added.

(Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)