WASHINGTON - (06/12/06) The steady rise of short-terminterest rates over the past two years has squeezed the 12 regionalbanks that make up the Federal Home Loan Bank system, so-calledbankers banks that serve as liquidity source for commercialsbanks, thrifts and credit unions, much like the corporates do forcredit unions. Rising rates, especially for the banks coreshort-term financial products, have driven up both the costs offunds and the return on investments, battering the financials formany of the FHLBs. The Chicago FHLB, for example, progenitor of theFHLBs secondary mortgage market program and one of thebigger FHLBs, saw 24% drop in first quarter earnings, as the spreadbetween interest earning assets and interest bearing liabilitiesshrunk from 0.0% to just 0.35% over the past year. During thattime, higher rates pushed up interest income 20%, but pushedinterest expenses by 28%. All of the FHLBs have reported similartrends. The Indianapolis Bank reported a 7% decline in earnings asinterest expense surged 46% over the past year. The Seattle Bankreported a halving in net interest margin to just 0.16% for thefirst quarter. The New York Bank reported in average rate oninterest earning assets from 3.17% to 4.66%, but a rise in oninterest earning liabilities from 2.88% to 4.39%. Most of theinterest expense paid by the FHLBs is accrued on each banksshare of consolidated obligations of the 12 FHLBs that are sold onthe bond market. Those obligations are, in turn, used to fund the12 banks low-cost mortgage funding and the nascent secondarymortgage market program.
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