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Business News/ News / Uptick in FHLB Issuance Suggests More Supply Is Coming
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Uptick in FHLB Issuance Suggests More Supply Is Coming

The amount banks borrow from the Federal Home Loan Banks ticked higher last week, a harbinger of more demand ahead as a key central bank funding facility expires next month.

Uptick in FHLB Issuance Suggests More Supply Is ComingPremium
Uptick in FHLB Issuance Suggests More Supply Is Coming

(Bloomberg) -- The amount banks borrow from the Federal Home Loan Banks ticked higher last week, a harbinger of more demand ahead as a key central bank funding facility expires next month.

FHLB’s total debt outstanding rose last week, with $22 billion of net issuance, according to Citigroup Inc. It’s an indication that demand for short-term loans has started to rise again, though it’s nowhere near the weekly issuance seen during the banking turmoil in March 2023.

The uptick in demand comes as the Federal Reserve’s Bank Term Funding Program — unveiled during last year’s regional banking crisis to ease stress in the financial system — is set to end on March 11. With the loans maturing, banks could meet liquidity needs by borrowing from FHLBs. At least so far, the demand appears unconnected to any concern about New York Community Bancorp’s risk for US dollar-denominated funding markets.

“Given the BTFP facility is phasing out in March as scheduled, banks will return to the FHLB in need of liquidity," Citi strategist Shuo Li wrote in a note to clients on Friday.

The BTFP has allowed banks and credit unions to borrow funds for as long as a year, pledging US Treasuries and agency debt as collateral valued at par. Until last month, the rate for these advances was equal to the one-year overnight index swap rate plus 10 basis points. It’s now in line with the interest on reserve balances rate — currently 5.40%.

As a result, borrowing from the Fed’s emergency funding program has been drying up. Data from the Fed showed $164.9 billion in borrowing from the BTFP in the week through Feb. 7. That compares to $165.2 billion reached the week prior.

Read More: Demand for Fed’s Emergency Funding Tool Drops for Second Week

For financial institutions, that meant it was cheaper to borrow cash through the newer facility rather than the discount window, which charges 5.5%, or from Federal Home Loan Banks.

Domestic banks lost about $312 billion of deposits in January, according to Federal Reserve data. During that time, bank borrowing picked up, and FHLB demand remained flat, according to Citi.

Bank Angst

Even as uncertainty about the banking system flared recently, Citi’s Li believes the challenges faced by NYCB are isolated.

The regional lender stunned reported a surprise loss tied to deteriorating credit quality and announced a cut to its divided. But conditions stabilized after the bank released an update of liquidity conditions that showed a slight decline in deposits but strong liquidity positions.

To Li, unease about banks’ commercial real estate and multifamily loan exposure should be limited to only a few institutions. Banks broadly have more than enough capacity to continue tapping the FHLBs once the Fed’s BTFP expires, she wrote.

FHLBs typically cap the amount of advances to each member to between 20% and 60% of their total assets, depending on creditworthiness. That means those organizations with FHLB advances over 20% of their assets could have less room for borrowing in the future. But of the banks that meet that threshold, only eight have multifamily and CRE loan exposure exceeding 20% of assets, according to Citi.

“There’s plenty of room for the majority of banks to access from FHLB for liquidity in case of increasing capital needs," she wrote.

Read More: Why US Is Overhauling Federal Home Loan Banks: QuickTake

(Adds Citi’s outlook for future FHLB issuance in third paragraph and BTFP data in sixth paragraph.)

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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Published: 13 Feb 2024, 12:18 AM IST
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