Market Intelligence

Liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is among the most important activities that a bank conducts.

– FDIC: Risk Management Manual of Examination Policies, Section 6.1 – Liquidity and Funds Management

When you think of a true source of liquidity, invariably you think of FHLBank Pittsburgh – a provider of liquidity to the financial markets since 1932. After all, your membership in FHLBank is predicated upon the availability of reliable, affordable credit, primarily in the form of advances.

While you may wait days to fill a brokered CD order, or longer to acquire new deposits from a CD special, in many cases you can receive funds from an FHLBank advance request within minutes. Plus, unless you are specifically identified as a collateral delivery member, there is no need to deliver collateral to FHLBank to secure advances, as you would with the repo market. FHLBank advances are priced at the market, with FHLBank accepting only a slight credit spread. So you know you’re always getting a competitive rate.

In addition to providing liquidity, FHLBank Pittsburgh offers other services – beyond advances – that can assist you with liquidity management.

FHLBank Pittsburgh’s members-only Web site, Bank4Banks.com, provides instant access to portfolio reports that offer details on advance borrowings and advance borrowing capacity.

The Credit Inventory Report shows your specific advances, while the Portfolio Manager Report provides market values of option-embedded advances. The Portfolio Manager Report also includes a rate-shock analysis that may help you to identify disadvantages in certain rate environments and to chart the conversion of your advances.

Since access to liquidity is a function of collateral availability, you can access the Maximum Borrowing Capacity (MBC) Report that indicates your FHLBank borrowing limit. Or you can access the Quarterly Collateral Certification Form to get detailed information on qualifying assets that make up your MBC.

Many of these reports/screens include “what if” calculators and are easily available for sharing with your examiners.

Historically, members have recognized FHLBank Pittsburgh as a reliable source of credit funding. Increasingly, members understand that becoming a participant in the Mortgage Partnership Finance® Program is an important part of liquidity management as well. Since 1999, FHLBank Pittsburgh has purchased $40.8 billion in MPF Program mortgages from participating financial institutions.

As an alternative in the secondary mortgage market, the MPF Program generates liquidity through the purchase of conforming mortgages, while also providing fee income and relief from interest rate risk. Plus, adding the MPF Program to your list of funding resources proves to your regulator that your institution has sufficient and varied sources of liquidity.

Deciding which sources of liquidity to use is a big part of liquidity management. Banks consider many factors when deciding, for example, between wholesale funding or deposit gathering. While access to new deposits (and possible new customers) is invaluable to a financial institution, deposit gathering strategies such as CD specials often bring in hot money.

FHLBank offers you analysis to help you make the “advances or deposits?” decision, based on the true cost of each of these funding sources. Our Cost of Funds analysis can show your true cost of running deposit specials by calculating the effect of cannibalization of your less expensive deposit accounts. Once you know this true cost and can compare it to current advance rates, you will be in a better position to manage your funding costs.

The frequency with which customers contact their lenders, as well as the kinds of funding sources they use, are two indicators of the strength of funding relationships. Annually, FHLBank conducts a campaign encouraging members to exercise their borrowing ability with the FHLBank. During the campaign, members borrow $100,000 overnight at the current borrowing rate, then place the funds in their FHLBank demand deposit account at the current demand deposit rate.

The overall cost for this annual “check of advance access” is minimal, but it ensures that all requirements for borrowing are in place should a shortfall in liquidity ever occur. While our borrowing campaign lasts only a few weeks a year, this check of advance access is always available to you upon request.

FHLBank is pleased to provide products and services that help you with liquidity measurement, management and accessibility. We value our relationship and partnership with you and invite you to contact your FHLBank relationship manager or specific product managers to discuss how we can aid you in your overall liquidity needs.

Bank4Banks	Advance Reports/ Borrowing Capacity Reports	Eric Slomer Carrie Rayman	Ext. 5100
Advances	Funding and Funding Access Checks	Rob Merenick Mike Solomon Tom Westerlund	Ext. 4000
MPF	Mortgage Portfolio Liquidity	Jeff Acquafondata Peggy Stemmler	Ext. 5190
Collateral	Borrowing Capacity and Collateral Valuation	Dave Manganaro John Murphy	Ext. 7355

“Mortgage Partnership Finance” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.

DISCLAIMER
The information presented is not investment or business advice, nor is it an offer to extend credit or buy any security or financial product. Readers must not rely on any of this information when making any investment, business or credit decision.

FHLBank products are governed by various agreements between FHLBank and its customers, as well as certain FHLBank policies and applicable regulations. In the event of any inconsistencies between information contained in this article and such agreements, policies and regulations, the agreements, policies and regulations will be determinative.