Looking for liquidity

Northwestern Financial Review, Sep 4, 1999 by Mattson, Beth

Federal Home Loan Banks

open their coffers

to commercial banks

Ten years ago, the Federal Home Loan Bank system served zero commercial banks. Today, the number of bank customers has grown to more than 5,000. The FHLBank system was created in 1932 by Congress to provide a low-cost source of money for those financial institutions engaged in home mortgage lending. Up until August 1989, the FHLBank system was a lender to - as well as the chief regulator of-savings and loans. But as part of the savings and loan bailout, the regulatory role was dropped and membership was opened up to commercial banks and other financial institutions.

"What that has done from our perspective is made us focus increasingly on commercial banks, specifically to help meet their business objectives, provide products and services that would meet their traditional asset mix, as well as provide a means to broaden their asset and product mix," says William M. Woods, vice president and director of marketing and correspondent services at the FHLBank of Seattle.

In order to take out loans from the home loan system, financial institutions must apply for membership and hold lo percent of their assets in mortgages or mortgage-backed securities. In the past, some rural banking institutions had a hard time meeting the 10 percent requirement. New rules, however, make it even easier for rural banks to initiate or maintain memberships. Under the new regulations, a loan to a farm or business can be counted toward the lo percent requirement, as long as there is a residence on the property.

Stagnant deposit growth is driving many community bankers to seek greater liquidity through correspondent banks. "Deposit growth in this district has been very flat over the last five years," says Steve Reichle, a senior vice president and director of correspondent banking for the FHLBank of Topeka, Kansas. In addition, those core deposits show no signs of rebounding as more people continue to put their money into stocks and money markets versus savings accounts and CDs.

The continued decline of traditional core deposits has prompted community bankers to look elsewhere for capital. "They have had to find alternative sources of funding, and that is where the Home Loan Bank has come in to help them, both with liquidity and interest rate risk safeguards," says Craig Jordan, senior vice president of credit sales and marketing at the FHLBank of Des Moines. Iowa. "We really have moved into being a primary source of ongoing liquidity for the community banker in offering long term advances that help mitigate interest rate risk, and allow the community bankers to start making the type of loans that their customers want," Jordan says.

Many bankers are drawn to the FHLBank system because of their ability to provide long-term financing. "We can loan them money for one day to 15 years, and we can slice and dice just about any liability they would like to fund their assets with," Reichle says. "Having the ability to borrow short term and long term makes a great deal of sense to community ban ers.,

Commercial bankers also are discovering a growing menu of products and services offered by FHLBanks. "The interest in the other correspondent services has grown considerably, particularly over the last four to five years," Woods says. Safekeeping services, for example, have become very popular. FHLBanks also are receiving a surge in demand for services ranging from asset and liability management to investment management services.

The individual FHLBanks also operate various pilot programs to enhance the housing needs in their communities. For example, The FHLBank of Chicago plans to offer a mortgage partnership program that offers banks alternatives to the secondary market. Instead of selling the mortgages to the secondary market, community bankers that have joined the program will be able to sell those loans directly to the home loan bank in their territory, and share in some of the profitability and the ongoing relationship of that loan, Jordan says.

Another focus for the FHLBank system is economic development. "We're expanding our community investment programs dramatically through the balance of 1999 and into the 21st century," Jordan says. "It goes beyond providing lower cost funding for low and moderate income housing needs. It now is going to be expanded into offering additional sources of money for economic development and commercial lending needs in communities across the country," he says. Essentially, those funds will be aimed at helped to create new jobs as well as improve area infrastructure.

"What we're trying to accomplish across the country is to expand the relationship between the community bank, who is the owner of the FHLBank, and the market opportunity that we can offer through our AAA rating and our government sponsored enterprise status to become more of a trusted advisor to the banking community, and expand the partnership for the future," Jordan says.

COMMERCIAL BANKS

This is a small sampling of banks that offer correspondent banking services..