Dartblog

Unless you’ve spent your last 12 months honing your banking acumen in liquidity analysis of US banks, you’ve probably never heard of the Federal Home Loan Bank (FHLB, pronounced “Flub” - like the verb form of Flubber). The FHLB consists of 12 regional banks that are cooperatives owned by more than 8,000 commercial banks, thrifts, credit unions and insurers. They make loans to the institutions that own them, with collateral frequently consisting of home mortgages or related securities. In the golden years, when ballyhoo would have investors racing for anything implicitly guaranteed by Captain America, FHLB, like the other government agencies, could fund its business very attractively.

Recently, its cost of debt has skyrocketed wide of Fannie and Freddie and it has been forced to fund using only short term securities - imprudent from a risk management standpoint. US Banks have relied heavily on the FHLB as a source of liquidity and the financial fallout is beginning to erode the 70+ year old institution. Is this a nail that shuts the coffin? Doubtful as the Fed has been incredibly aggressive providing short term liquidity to the US banking system. Also, the FHLB has a backstop - access to the same credit facility as Fannie and Freddie in case it can’t sell short term debt to the open market. At some point, investors might come to the realization that FHLB debt should be priced more closely to Fannie and Freddie and we could see the spread between the agencies collapse.