As a partner in Brown Edwards Banking Services Group, I was delighted to host Scott Brennan and Todd Weicker from FHLB Atlanta for our spring quarterly banking update. Their insights on the Federal Home Loan Bank system and liquidity management were especially timely given the changes we've seen in the banking industry over the past year.
The Federal Home Loan Bank system operates with a dual mandate - to be a reliable source of liquidity and to support housing affordability for all. As Scott explained, the system consists of 11 independent banks that are self-capitalizing, with members purchasing stock to ensure the bank remains well-capitalized as its balance sheet grows.
Members use FHLB for various reasons:
Notably, the FHLB system demonstrated its resilience during the March 2023 banking “crisis” and related liquidity event. Scott shared that the Atlanta office had record advance levels on Monday following the crisis, only to be broken the following day. He observed that the FHLB system is designed to expand and contract based on members' liquidity needs, enabling it to respond effectively during times of crisis.
Todd emphasized the importance of comprehensive liquidity planning. He outlined how effective planning starts at the board level, where policies addressing liquidity and contingent funding are developed. Senior management then executes these policies, with the ALCO committee monitoring the liquidity profile and risk exposures.
The presenters discussed various funding products available through FHLB Atlanta, including overnight to 20-year term options, fixed and floating rate products, and options with symmetrical prepayments. Most funding activity occurs in the shorter-term space (overnight to three months), serving as gap funding to manage cash positions.
One interesting option is the convertible advance, which allows members to sell options back to the FHLB to lower funding costs. While this facility includes call risk if rates move up, this option can be particularly useful as part of a blended strategy to reduce overall funding expenses..
Scott highlighted FHLB's commitment to affordable housing through various grant and subsidized programs. Each Home Loan Bank is required to reinvest 10% of its net income back through these initiatives, including:
Todd shared valuable insights on current banking trends in the Southeast. Despite recessionary worries entering 2023 and 2024, the data shows continued growth in their footprint. Asset growth remains strong across member institutions, and interestingly, Q1 of 2024 saw a significant increase in residential lending activity despite high mortgage rates.
The presenters also noted that deposit growth continues across their footprint, with most members reporting that deposit growth occurs even without running specials or raising rates. Possible factors include money moving out of money market funds back to banks, and funds shifting from equity markets due to uncertainty.
As we navigate the current banking environment, the insights from FHLB Atlanta remind us of the importance of relationship-based liquidity planning. Their role as a reliable funding partner, particularly during times of market stress, demonstrates why maintaining strong connections with the FHLB remains a critical element of sound balance sheet management. In addition, taking advantage of the various affordable housing initiatives could provide not only discounted funding but also strengthen community relationships and fulfill CRA obligations.