WASHINGTON — Wells Fargo Bank has dramatically increased its borrowings from the Federal Home Loan Bank of Des Moines, more than doubling the San Francisco institution's level of advances and accounting for the majority share of borrowings at the government-sponsored enterprise.
Wells borrowed $40.1 billion from the Des Moines bank, raising its level of total advances with the institution to $77.1 billion. At the end of the year Wells’ borrowings accounted for nearly 59% of Des Moines Home Loan bank’s total advances.
Wells’ borrowing was so significant that it accounted for more than half of the total $71.2 billion increase in advances at all 11 of the Home Loan banks in 2016. Overall, the banks had $705.2 billion in advances at the end of the year.
The abrupt surge in growth in advances by Wells raises several questions, including why it needed so much so soon and whether there is concentration risk in one institution accounting for so much borrowing at a single Home Loan bank.
"It is a problem when a FHLB is dependent on one member institution," said Basil Petrou, co-managing director of Federal Financial Analytics. "What happens if Wells Fargo decides to move its business to another FHLB?"
Other Home Loan banks with large concentrations of advances with one member have ended up burned in the past. The Seattle Home Loan bank merged with the Des Moines institution in part because its largest member, Washington Mutual, failed in 2008.
"Seattle was dependent on Wamu and now Des Moines is dependent on Wells Fargo," Petrou said. "And you never think anything bad is going to happen until it does."
Through its various charters, Wells has access to more than one Home Loan bank, but has opted to concentrate its advances at Des Moines through its Sioux Falls, S.D.-based bank. Wells is also a member of the Dallas and San Francisco Home Loan banks.
"Our other bank charters have access to other FHLB locations, but we have decided to engage primarily through Des Moines through our WFBNA charter," a Wells Fargo spokesman said Monday in a written response to a reporter's question.
As for why the bank's borrowing has grown so dramatically, Wells declined to give an answer. Petrou said he suspects the reason is higher financing costs after Wells' phony-accounts scandal. The incident led to regulatory fines and downgrades by the credit rating agencies.
The Federal Home Loan banks provide the "cheapest funding," Petrou said.
Jim Vogel, executive vice president for FTN Financial, noted that Home Loan bank advances were "quite attractive" last year thanks to a widening of Libor spreads and tightening in agency discount and floating-rate notes.
"Several large banks were shopping for FHLB advances last year," Vogel said.
John Makeray, vice president of Global Financial Institutions Group, noted that banks had to meet higher liquidity requirements as of Jan. 1, 2017, and the Federal Home Loan banks offer attractive rates.
"For Wells Fargo, $40 billion is not big number,” Maokeray said. "Wells always looks for the cheapest source of funding."
In its 2016 annual securities filing, Wells Fargo mentioned the federal banking agencies liquidity requirements.
"We further strengthened our liquidity position in 2016 in advance of the increase on January 1, 2017, to the minimum liquidity coverage ratio regulatory requirement," Wells Fargo said.
Officials at the Des Moines Home Loan bank said there is nothing unusual or risky in Wells' move.
"Wells is a creditworthy customer and they have to post adequate collateral for the advances and buy stock in the FHLB," Michael Wilson, the Des Moines bank's president and CEO, said in an interview. "The benefit for FHLBs is the income from large members covers a lot of the operating expenses."
He noted there are other benefits as well.
"We also generate a large amount of affordable housing program set asides from that income as well," Wilson said. "Large members also create a lot of liquidity in our debt, which is makes it attractive for investors. We view it as a positive for the bank."
Wells is not the only large bank that has boosted advances in recent years. In 2012, there was a significant surge in advance borrowing by JPMorgan Chase, Wells, Citigroup and Bank of America. Total system advances jumped to nearly $500 billion by the end of 2013 from $381 billion in March 2012. The increase was largely a result of new Basel III liquidity requirements, but it sparked a review by the Federal Housing Finance Agency's Office of Inspector General.
The IG audit concluded the surge raised concerns about concentration risk as well as the system's commitment to its housing mission if advances are being used to meet liquidity requirements as opposed to making new mortgage loans.
"We believe the FHFA can take steps to enhance transparency about recent trends in FHLB advances and their potential implications," the report said.
Bruce Morrison, the former top regulator for the Home Loan banks and now chairman of the Morrison Public Affairs Group, said the "role of the largest banks in the FHLB system has always been controversial."
The individual Home Loan banks are largely dependent on the borrowing of their largest members. Otherwise, the 11 banks would have to consolidate if they served just community banks, Morrison said.
"It is not a safety and soundness problem," Morrison said. "It is a mission question: Is a GSE supposed to provide cheap money to one of the largest banks in the world?"
The Home Loan banks have significant support in Congress because they serve community banks, Morrison added. "However, they kind of blind themselves to the fact that most of the borrowings are going to the megabanks," he said. "The economics of having someone that has 60% of the advances is that the tail wags the dog. That is driving the economics of the entire institution in an overwhelming way."
But David Jeffers, executive vice president of the Council of Federal Home Loan Banks, said borrowings by large members help smaller institutions as well.
"The borrowing of larger members produces economies of scale which is beneficial to smaller members and lowers their borrowing costs," he said. "The financial system relies on the FHLBs to provide member institutions with reliable liquidity. And to do that requires the banks to remain a cost-efficient and evenly priced source of short and long-term funding. And that creates a fair playing fielding for constant access by all FHLB members to a deep and liquid market of global funds."
The Federal Housing Finance Agency declined to comment for this story. As a general policy the agency does not typically approve or disapprove well-collateralized advances to eligible members in good financial standing. However, the regulator does consider the risks involved in having such a large volume of advances to one member.
Petrou said Congress should consider reforms to the Home Loan banks when it takes up reform of the other government-sponsored enterprises.
"I think the FHLBs need to be part of the GSE restructuring," Petrou said. And they should be merged into a centralized FHLB system with one or two FHLBs. "The only reason we have so many FHLBs today is because the system was created in the 1932," and it was patterned after the Federal Reserve System.
"Regional relationships were important in the past," Petrou said, "but not anymore."