FHLBs Roiled By End Of Cheap Money

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The steady rise of short-term interest rates over the past two years has squeezed the 12 regional banks that make up the Federal Home Loan Bank system, so-called bankers' banks that serve as liquidity source for commercials banks, thrifts and credit unions, much like the corporates do for credit unions.

Rising rates, especially for the banks' core short-term financial products, have driven up both the costs of funds and the return on investments, battering the financials for many of the FHLBs.

The Chicago FHLB, for example, progenitor of the FHLBs' secondary mortgage market program and one of the bigger FHLBs, saw a 24% drop in first quarter earnings, as the spread between interest earning assets and interest bearing liabilities shrunk from 0.5% to just 0.35% over the past year. During that time, higher rates pushed up interest income 20%, but pushed interest expenses by 28%.

All of the FHLBs have reported similar trends. The Indianapolis Bank reported a 7% decline in earnings as interest expense surged 46% over the past year. The Seattle Bank reported a halving in net interest margin to just 0.16% for the first quarter.

The New York Bank reported its average rate on interest earning assets from 3.17% to 4.66%, but a rise in on interest earning liabilities from 2.88% to 4.39%.

Most of the interest expense paid by the FHLBs is accrued on each bank's share of consolidated obligations of the 12 FHLBs that are sold on the bond market. Those obligations are, in turn, used to fund the 12 banks' low-cost mortgage funding and the nascent secondary mortgage market program.

Ed Roberts can be reached at robertscuj cujournal.com

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