Primer on Federal Home Loan Banks unveiled
By Dian Vujovich
Special to the Daily News
If you don't know much about the Federal Home Loan Banks, you're not alone. This government-sponsored agency has a penchant for privacy even though it exists because of an Act of Congress and has the very public purpose of loaning money.
But, thanks to Denise de Bombelles' presentation June 7 at the Palm Beach Business Group's meeting at 264 the Grill, that all changed for the three dozen in attendance.
De Bombelles is vice president of global investor relations at the Federal Home Loan Banks' Office of Finance in Washington, D.C.
"The information I'm giving all of you is public, but we prefer to reach investors and talk to investors in venues like this, one-on-one and in small groups," said de Bombelles, adding that in smaller gatherings the FHL Banks grew its investor base.
But, before anyone becomes an investor in any of the FHLB cooperative offerings, there's plenty to learn. For openers, the FHLB is not a publicly traded corporation such as Freddie Mac and Fannie Mae. It is a cooperative owned by its member institutions that are primarily commercial banks, thrifts, insurance companies, credit unions and others.
One of many things that set the cooperative apart from other debt issuers is its track record.
According to de Bombelles, the organization has not had any credit losses in more than 80 years. As a result, investors are willing to pay up for the triple-A-rated paper that the Office of Finance issues for all of its banks.
Last year, not including overnight debt instruments, the cooperative issued $2.1 trillion in triple-A-rated fixed-income securities, making it the largest issuer of non-sovereign high-quality fixed-income securities, de Bombelles said.
Given the vastness of the subject, here's a little primer based upon what de Bombelles shared in the breakfast meeting, as well as answers to questions from the audience, including those from Stuart Weinstein, Bill Diamond and Paul Bergman of Palm Beach:
How many Federal Home Loan Banks exist? Twelve. It was created in 1932 and is a government-sponsored enterprise. Congress first established government-sponosored enterprises in 1916 when the Farm Credit System was created. Freddie Mac and Fannie Mae also are government-sponosored enterprises.
Where are the banks located? While their locations may be in the same locations as you'll find Federal Reserve Banks, such as in New York, San Francisco and Chicago, that was not the intent. The locations mirror where the economic development of the United States occurred after 1932, according to de Bombelles. As a result, there is a larger concentration of them east of the Mississippi.
What is the cooperative's mission? To provide liquidity to the banking sector and to financial institutions via monies raised through the cost of membership and lending.
How many banks and institutions are members? Approximately 7,800, everything from large commercial banks to credit unions and smaller community banks.
How is the money raised in the capital markets used? It is lent to member institutions.
What types of securities does it issue? A host of them, including discount notes, bonds with fixed rates and various maturities, callable bonds and more.
Are each of the 12 banks managed as one or separately? Each bank manages its own business and investment portfolio. A portfolio that in the aggregate amounts to about $200 billion.
Do the banks use leverage? Yes. The amount is determined bank by bank as each makes its own investment decisions. e Bombelles said each bank realizes that it's in the lending business and not in the leveraged business.
Can it lend to foreign institutions? The cooperative can only lend to U.S.-regulated institutions. That does include, however, foreign banks that have a U.S. charter.
Does it have any exposure to foreign banks through unsecured portfolios? Yes, but exposure has been in instruments with very short durations, such as those maturating between 45 and 60 days.
What would happen if one of the securities in a portfolio had problems? What joins the 12 banks together is their debt. As de Bombelles says, that debt is "joint and federal," meaning that all of the banks stand behind each security in all portfolios.
Is the debt program open to individual investors who are non-instutional investors? Yes.
Are these securities tax free? The cooperative and Farm Credit Banks are both exempt from state and local taxes.
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