FHLBank Pittsburgh – Lender of Best Resort for 75 Years
In a September 12 Wall Street Journal article entitled “Liquidity Now!” by Martin Feldstein, the Harvard professor and former chairman of the Council of Economic Advisers commended the Federal Reserve for emphasizing its role as the “lender of last resort” to banks in need of liquidity during the current credit market crisis.
Surprisingly, the article failed to mention the emphasis that FHLBank Pittsburgh and its eleven sister Home Loan Banks have placed on being a provider of liquidity – often as the best resort – to financial institutions during various credit and business cycles over the last 75 years. The recent increase in collateralized loans to member banks, also called advances, demonstrates that despite turmoil in other short-term financing markets, FHLBank Pittsburgh remains an important source of liquidity for its members.
Current Market Environment Creates Uncertainty
The uncertainty created by the problems in the asset-backed commercial paper market has disrupted the traditional market for inter-bank lending, causing the normally stable London Interbank Offered Rate (LIBOR) for loans to banks to skyrocket. This has placed large correspondent banks, which have relied historically on LIBOR-based funding, at a disadvantage when trying to offer liquidity funding to their financial institution clients.
The current negative credit environment has had a negative impact on the price and availability of another source of short term liquidity for banks: repurchase agreements (repos). The recent collapse of the syndicated debt market has forced many correspondent and investment banks to retain large corporate loans on their own balance sheets, reducing the amount of capacity available for repos. Indicative rates for repos with terms beyond one month have widened considerably during the last several weeks, and in some cases repos with maturities beyond 12 months have been unavailable.
FHLBank Advances Remain a Stable Source of Liquidity
Despite the increase in the cost of short-term liquidity available to banks, the price of most FHLBank Pittsburgh advances has actually declined since the credit market crisis began six weeks ago. As an example, member financial institutions have been able to obtain funding from FHLBank Pittsburgh at a savings of as much as 47 basis points* below the cost of one-month LIBOR-based loans.
An FHLBank Pittsburgh press release distributed the day after the Wall Street Journal article confirmed the key role FHLBank Pittsburgh is playing as a provider of liquidity to financial institutions throughout Delaware, Pennsylvania and West Virginia. For the two months ended August 31, 2007, the average balance of advances outstanding to FHLBank Pittsburgh members was $56.4 billion, an increase of more than 23 percent over the second quarter average balance of $45.8 billion reported for June 30, 2007.
The Federal Reserve deserves the accolades of Professor Feldstein in light of the Federal Open Market Committee’s bold decision on September 18 to reduce both the Fed Funds Rate and the Discount Rate by 50 basis points. Time will tell whether additional rate reductions will be needed to avoid the type of serious economic downturn that would prolong the existing credit market crisis. In the meantime, do not hesitate to contact your lender of best resort for competitively-priced liquidity funding: FHLBank Pittsburgh.
* As of 8/31/07: 5.25% indicative rate on standard-priced FHLBank Pittsburgh 1-month RepoPlus fixed-rate advance vs. 1-month LIBOR setting of 5.72%.
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The information presented in the article 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.