Presentation - Western Independent Bankers

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					Federal Home Loan Bank of Seattle

Federal Home Loan Bank Advances – One Source
of Liquidity

Rick Riccobono, President and Chief Executive Officer

February 11, 2009
The Federal Home Loan Bank System
   Chartered by Congress in 1932
   Government-sponsored enterprise (GSE) to ensure that financial
    institutions have access to adequate funds they can use to lend for
   Twelve Regional FHLBanks
   Each FHLBank owned by member-shareholders and operated
    independently (Cooperative ownership)
      – All federally insured depositories and insurance companies
        engaged in residential housing and/or community financial
        institutions are eligible.
   More than 8,100 total bank, thrift, credit union, and insurance company
   AAA credit rated by Standard & Poor‟s and Moodys
   Regulated by the Federal Housing Finance Agency
FHLB System Map
Federal Home Loan Bank System Debt Ratings

 FHLB debt securities (also known as consolidated obligations or
  COs) are rated by both Moody's and Standard & Poor's. All
  long-term debt issued by the FHLBanks is rated „Aaa‟ by
  Moody's and „AAA‟ by Standard and Poor's. All short-term debt
  is rated „P-1‟ by Moody's and „A-1+‟ by Standard & Poor's.
 The BIS-risk weighting is 20% in most countries.
 These outstanding ratings reflect the FHLBank System's
  financial strength, sound management, low derivatives risk
  exposure, status as a Government-Sponsored Enterprise and
  other links to the U.S. government.
Federal Home Loan Bank System Debt Quality
   Ratings Rationale
   Lending agreement with the US Treasury f or a contingent liquidity borrowing f acility
   The System has GSE status and inherent f inancial strength
   "Joint and several liability...provides significant support" (Moody's)
   "All advances (loans) to members are overcollateralized" (Standard & Poor's)
   These secured loans represent 71% of assets at September 30, 2008
   "Excellent asset quality" (Moody's)
   "Conservative risk-adjusted capitalization" (Standard & Poor's)
   The System's liquidity has been strong (Moody's)
   "Excellent asset quality" (Standard & Poor's)
   "Credit risks are being managed well" (Moody's)
   "Funding f lexibility is superior" (Standard & Poor's)
   Regulatory capital-to-assets ratio of 4.4% at September 30, 2008
   Links to U.S. Government
   Created to serve a public purpose
   Recognized f or its actions during the current credit crisis
   Authorized by the Federal Home Loan Bank Act, as amended
   Regulated by the Federal Housing Finance Agency (FHFA)
   Eligible to tap the GSE Credit Facility
   The Fed is currently active in purchasing FHLBank debt
   Interest on FHLB debt securities exempt f rom state and local income tax
   Contributes hundreds of millions of dollar annually (out of earnings) towards U.S. af f ordable housing
   Pays hundreds of millions of dollars annually to support the savings and loan deposit insurance f und
   Debt issuance subject to U.S. Treasury approval
   Fiscal agency agreement with Federal Reserve
   Eligible f or collateral f or certain public deposits
   Eligible f or investment by national banks and thrif ts
The Seattle Bank

       Mission: “To provide liquidity, funding and services to
    enhance our members’ success and the availability of affordable
                 homes and economic development in
                          their communities.”

   Advances address liquidity and balance sheet management needs
    of members.
   Affordable housing and economic development funds offer direct
    subsidy grants and low-interest loans to members and non-profit
The Seattle Bank

   Federally chartered, member-owned cooperative –1964.
   All federally insured depositories and insurance companies
    engaged in residential housing and/or community financial
    institutions are eligible for membership.
   Purchase of stock required for membership and advance
   Members are assigned credit lines and are eligible for dividends.
   380 members.
FHLB Seattle Business Profile

                             12/31/2006       12/31/2007       9/30/2008

 Asset Size:                $53.5 billion    $64.2 billion    $76.2 billion

    Advances:               $27.9 billion    $45.5 billion    $46.3 billion

    Cash & Investments:     $18.6 billion    $12.5 billion    $24.3 billion

    MPP:                    $ 6.4 billion    $ 5.6 billion    $5.2 billion

 Net Income:                $ 25.7 million   $ 70.6 million   $41.8 million

 Capital to Assets Ratio:      4.30%            4.14%            4.18%
Increased Focus On Credit Risk

   Some logical questions focusing on member credit and
    collateral management practices at the FHLBanks:
     – Who can borrow from the FHLBanks and how do you
        evaluate their creditworthiness?
     – What types of collateral do the FHLBanks accept and how is
        it valued?
     – What is the credit quality of the mortgage programs and
        MBS investments?
     – What are the FHLBanks‟ exposure to subprime and non-
        traditional mortgage collateral?
Liquidity, Interest Rate and Credit Risk
   Advances and liquidity investments:
     – Generally manage interest rate risk on a transactional basis
     – Use debt and derivatives to hedge interest rate risk

   Conservative credit risk tolerances and profile
     – Advances – all over-collateralized with perfected security interest
     – Credit Risk Management: Physical Possession, Borrowing
       Restrictions, Collateral Verification and Monitoring
     – MPP assets – all credit enhanced to AAA-equivalent, using cash
       reserve and mortgage insurance
     – Investments and Derivatives – highly rated securities and
Seattle Bank: Multiple Liquidity Sources
   Liquidity Risk: “The risk that we may be unable to meet our financial
    obligations as they come due or meet the funding needs of our
    members in a timely, cost effective manner.”

   Primary Sources: New COs, Short-Term Investments

   Secondary Sources: Fed Funds, R/P, Capital, Member Deposits, Lines
    from U.S. Treasury

   Contingent Liquidity Requirement: Contingent Sources: (cash, self-
    liquidating assets, the borrowing capacity of AFS securities, lines of
    credit) must exceed Contingent Needs: (advance commitments,
    maturing FF and R/P, maturing COs, “in-the-money” callable COs,
    mortgage loan commitments, securities settlements, other forecasted
The Seattle Bank‟s Historical Role in Providing
Member Liquidity
   “Raising Funds Quickly, without Principal Loss at a Reasonable
    Cost” (…Darling Consulting Group)

    – Balance Sheet Liquidity = On-Balance Sheet Liquid Assets
    – Strategic Reserve = Coverage of Deposit Volatility
    – “Just-in-Time Inventory” = FHLB Seattle Bank Availability
      (Collateral Management and Contingent Liquidity Planning)
    – Catastrophic Insurance = Federal Reserve Bank
Rationale for Advance Usage
 Liquidity management

 Funding loan growth

 Asset/liability management
    – Transactional micro hedges
    – Balance sheet macro hedges

 Minimizing liability costs

 Wholesale leveraging
Quantifying The Seattle Bank‟s Role in
Providing Member Liquidity
Liquid Assets (unpledged securities)
Potential Deposit Volatility (% of maturing deposits)
Available Seattle Bank Borrowing Capacity (lesser of availability
   under credit line or collateral)
Net Brokered CD Policy Access

A Forward Look at Liquidity….
Net New Loans
Changes in Deposit Growth
Non-Liquid Securities Maturities

= Liquidity Forecast (….and the starting point of contingent
   liquidity planning)
Effective Liquidity Management Flow

 Define Liquidity Sources
 and Their Purposes

                                Quantify Liquidity

                                Execute Contingent
     Develop Forecasts
                                Liquidity Planning
FHLB System Products and Services

 Credit Products and Services
   – Wholesale Advances
   – Letters of Credit
   – Technical and Educational Support
 Cash Management and Safekeeping
 Community Investment Programs
   – Housing grants
   – Below posted rate advances
   – Long term forward interest rate locks