After a steep plunge in the amount of housing finance aid given to banks, federal money poured into the country’s largest lenders in 2012 and 2013, as liquidity at the banks found stable ground, according to a report released Wednesday by the Federal Housing Finance Agency.
Secured loans, or advances, from the Federal Home Loan Banks system to lenders dried up significantly after the market crash of 2008, when the loans peaked at about $1 trillion. At its lowest, in March of 2012, FHLBank contributed $381 billion to its member banks.
But since then, advances have risen to $492 billion, largely due to a flood of secured loans to the system's four largest members ‒‒ JPMorgan Chase, Wells Fargo, Bank of America, and Citibank. These lenders accounted for $135 billion of the contributions through 2013. $48 billion went to JPMorgan Chase, accounting for the biggest single increase in secured loans.
By contrast, all other members of FHLBank accounted for just 9 percent of the increase.
The reason for the torrent of new money to the largest lenders, according to FHFA, is that these banks have increased their use of advances as part of an overall strategy to comply with regulatory requirements established by the international Basel Committee on Bank Supervision. The Basel III regulations, written in 2010, establish international liquidity requirements for commercial banks to help ensure financial stability. To meet Basel standards, banks may need to increase their holdings of high-quality liquid assets, such as U.S. Treasury securities, which officials from FHFA and FHLBank said the largest lenders are doing.
According to the FHFA Office of the Inspector General, one potential benefit of the surge in secured loans to the largest lenders should be a stabilization of the finances of individual FHLBanks and possibly the FHLBank system as a whole, as increased interest income generated by advances would generate more contributions to member banks’ affordable housing programs.
That is, of course, if the surge in advances to the largest members translates into materially higher interest income, which it has not yet done. FHFA also cautioned smaller members not to rely on income generated by advances to the largest members.
FHFA believes the surge should help the system increase its focus on as core housing-mission related assets, such as advances and mortgage assets purchased from members, though it worries that the increasing use of advances by members to meet Basel III’s liquidity requirements could raise public concerns about the system’s commitment to its housing mission obligations.
The most major concern, however, is that a concentration on large lenders could cause serious trouble if one or more of these lenders were to default on advance money. Large banks, the report stated, need to ensure that assets are properly collateralized in order to stave off what could be a devastating blow to the system.
FHLBank officials, however, are aware of the potential pitfall and said that collateral management is a high priority.